Post MSM’s  analyst  briefing  last  Friday,  we  are  lifting  our  FY13  and FY14  core  earnings  forecasts  by  6.5%  and  1.5%  respectively. Management guided that the utilisation of raw sugar mix will normalise in  2HFY13, with  its  LTC  requirement  to  procure  50-60%  of  its  total  raw sugar needs at USD0.26/lb. We raise our FV to MYR4.78 (from MYR4.71) based on an unchanged 13x FY14 P/E. Maintain NEUTRAL. 
 
- Segmental sales performance. MSM’s 1HFY13 local export and export sales  surged  by  51%  and  104%  y-o-y  respectively.  In  terms  of  volume, both rose by 75% and 152% y-o-y. Meanwhile, domestic sales and sales volume  declined  by  0.5%  and  5.3%  y-o-y  respectively.  Overall, MSM’s 1HFY13  topline,  excluding  the  sugar  subsidy  collected,  rose  11%  y-o-y while total sales volume improved by 13% y-o-y.

- Lower  raw  sugar  cost  in  1HFY13.  We understand that MSM’s mix of raw  sugar  utilised  at  market  price  to  long-term  contract  supply  (LTC) price  stood  at  70%:30%  in  1HFY13,  compared  with  25%:75%  in 1HFY12.  This  explained  the  improvement  in  EBIT  margin  in  1HFY13 (+290bps to 16.9%). For 2HFY13, Management  guided that the mix will normalise,  with  its  LTC  requirement  to  procure  50-60%  of  its  total  raw sugar needs at USD0.26/lb. 

- Outlook for global sugar market. The recent frost in Brazil had driven up  raw  sugar  prices  in  the  past  month  amid  worries  of  a  reduction  in sugarcane yields. However, the loss quantum turned out to be minimal, which sent sugar prices down again. In addition, the weak BRL vs USD encourages Brazilian sugar producers to increase their exports and  this may further soften sugar prices. 

- Forecasts.  We  increase  our  FY13/FY14  core  earnings  forecasts  by 6.5%  and  1.5%  to  MYR250.5m  and  MYR258.6m  respectively,  after revising some of our core assumptions (see pg 3).

- Investment  case.  We raise MSM’s FV to MYR4.78, pegged  to  an unchanged  13x  FY14  P/E.  Maintain  NEUTRAL,  as  the  stock  still  offers decent dividend yields of 3-4% at the current level.

Source: RHB