KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised loss narrowed down further to –RM68.8m driven by higher revenue and lower running cost

• Cumulative 9MFY20 normalised loss also contracted to –RM90.8m which is slower than our expectation

• Demand from export and industries segment to remain upbeat while local demand could remain a drag

• There are continuous sign of recovery though it could be at a slower pace than initially expected

• Downgrade to NEUTRAL with revised TP of RM0.56

Quarterly loss narrowed down further. MSM Malaysia Holdings Bhd’s (MSM) 3QFY20 normalised loss narrowed down further to –RM68.8m from 3QFY19 normalised loss of –RM185.1m. The improvement in financial performance was mainly due to higher revenue recorded (+11.8%yoy) and lower operating cost. Cumulatively, 9MFY20 normalised loss contracted –rm90.8m (vs 9MFY19: -RM122.5m). Nonetheless, the recovery in financial performance came in slower than ours and consensus’ expectations.

Strong export demand. Despite the Covid19 pandemic, 3QFY20 revenue came in at RM594.6m which was +11.8%yoy higher as compared to 9MFY19. This was mainly supported by the industries and export segment which grew by +11.3%yoy and +434.4%yoy to RM236m and RM171m respectively. Both segment reported better sales volume and average selling price as compared to 3QFY19 (refer to table 1). Meanwhile, the wholesale revenue came in -35.6%yoy lower at RM183m, mainly due to lower retail demand following the Covid-19 pandemic.

Impact to earnings. We made no changes to our revenue assumption. However, we are adjusting the cost structure to better reflect the result thus far. As such, we expect FY20 loss to come in at -RM106.0m before recording a profit of RM9.0m in FY21.

Target Price. Post our earnings adjustment, we are reducing our target price to RM0.56 (previously RM0.74). Our valuation is based on forecasted FY21 book value per share of RM1.12 to the price-to-book ratio of 0.5x. Our target PBV is the group’s two year historical average multiple.

Downgrade to NEUTRAL. We are comforted by the continuous improvement in the group’s financial performance as seen in its 2QFY20 results. This is despite the advent of the Covid19 pandemic. While we acknowledged that it was still a loss-making quarter, the losses had gradually reduced. Moving forward, we expect demand from the export and industries segment to remain upbeat. However, the group’s revenue performance could be impacted by the underperformance from the wholesale segment. Thus, we maintain our view that the group’s financial performance would continues to improve in the coming quarters although the rate of improvement could be slower than initially anticipated. Given that we expect the group to make a little profit in FY21, we do not impute any dividend assumption yet. On another note, there is also uncertainty with regard to the top management of MSM. As we do not much positive catalyst at this juncture, we are downgrading our recommendation on MSM to NEUTRAL from BUY previously.

Source: MIDF Research - 17 Nov 2020