MSM’s 1QFY13 earnings were  marred  by  declining  domestic  volume amid increasing foreign competition, which led to 9.1% y-o-y drop in net profit  to  MYR60.5m.  While  the  price  of  its  key  input,  raw  sugar,  has fallen  off  the  peak,  the  group  did  not  reap  the  full  benefits  of  declining raw material costs since most of its raw sugar supply is locked in via a long-term contract. Maintain NEUTRAL, with our FV at MYR4.71.

-  In line. MSM’s 1QFY13 revenue fell to MYR515.0m (-3.2% y-o-y, -15.9% q-o-q)  amid  disappointing  domestic  sales  volume.  Earnings,  meanwhile, stood at MYR60.5m (-9.1% y-o-y, +60.1% q-o-q) as weaker sales volume dragged down y-o-y profits while seasonally lower raw sugar costs lifted sequential growth. The quarter’s profits represent 25.7% and 24.6% of our and consensus’ full-year earnings expectations.  

-  Domestic  weakness  persists.  The  Malaysian  sugar  industry  has  been subject to market forces since the Government stopped subsidizing sugar consumed  by  the  13  largest  food  &  beverage  (F&B)  industrial  players from  Jan  2012.  This  has  led  to  declining  domestic  sales  as  F&B manufacturers  sought  cheaper  alternatives  to  contain  rising  costs.  For instance,  some  heavy  sugar  consumers  such  as  condensed  milk producers are now meeting  their sugar needs by buying from refiners in neighbouring  countries  such  as  Thailand,  which  are  offering  cheaper (albeit slightly lower quality) sugar.  

-  Raw  sugar  price  on  a  downtrend.  Raw  sugar  prices  have  fallen  by some 40.9% off their July 2011 peak, settling at 17.4 US cents per lb last Friday from 29.5 US cents per lb 10 months ago. While lower raw sugar prices and the recent strengthening MYR will help ease cost of sales, this reduction  may  be  somewhat  insignificant  given  that  more  than  60%  of MSM’s raw sugar purchases have been locked in at 26.0 US cents per lb, which is now 49.2% above the current market price.

-  Maintain  NEUTRAL.  We  are  keeping  our  forecasts  unchanged  and continue  to  value  MSM  at  a  FV  of  RM4.71,  based  on  13.0x  FY14  P/E. Despite  the  challenging  business  environment,  the  stock  still  offers  a decent 3.8% dividend yield. 

Source: RHB