We consider MSM’s 9M14 earnings to be in line, as 4Q14 could see a recovery in EBIT margins. While MSM still faces potentially declining domestic volumes, we believe the absence of an LTC come 2015 and the current low raw sugar prices would bode well for margins. We raise our TP to MYR5.74 from MYR5.23 (17% upside) and upgrade to BUY. We highlight MSM’s decent dividend yield of 4-5.5% per annum.

In line. We consider MSM’s 9M14 net profit to be in line with our and consensus expectations, making up 67-69% of FY14 forecasts. In 3Q14, MSM utilised a larger amount of highly-priced long-term-contract (LTC) raw sugar (50% of requirements, due to timing of shipments) vs the normal average of 25-30%, which resulted in EBIT margins falling to 10.9% (from 17.1% in 2Q14 and 19.1% in 3Q13). LTC sugar is priced at USD0.26/lb (vs current market price of USD0.16/lb). In 4Q14, the amount of LTC raw sugar utilised should reduce by 67%, which could push EBIT margins back to similar levels seen in 2Q14.  

Key briefing highlights: i) total sales volume rose 2.2% in 9M14, coming mainly from stronger industrial sales offset by lower domestic and export sales, ii) the sugar import permit issue has worsened, with 32 permits issued in 3Q (vs 16 in 2Q14), meaning increasing cheap Thai imports, and iii) raw sugar prices remain low at USD0.15-16/lb, which management believes will remain low until 2H15. As such, MSM has acquired more than 50% of its FY15 raw sugar requirements at these low prices, which should bode well for its earnings in FY15, particularly if there is a need to adjust selling prices downwards.

Risks. i) a worse-than-expected slowdown in domestic sugar demand,    ii) a spike in raw sugar prices, iii) a weak MYR vs USD, and iv) no LTC for raw sugar.

Upgrade to BUY. Although MSM still faces the issue of potentially declining domestic volumes due to the sugar import permit issue, we believe the absence of an LTC come 2015 and the current low raw sugar prices bode well for margins. We raise our TP to MYR5.74 (from MYR5.23), based on a 15x CY15 P/E, which is in line with the stock’s    2-year historical average P/E. We highlight that MSM’s dividend yield is also relatively decent at >4% per year.

Source: RHB