FY14  net  profit  met  our  expectations,  but  was  above  consensus’estimates.  We  maintain  our  BUY  recommendation  with  a  relatively unchanged TP of MYR5.75  (from MYR5.74), offering a 15% upside. We continue  to  expect  lower  raw  sugar  prices  to  sweeten  margins,  and therefore earnings in FY15. This, combined with decent dividend yields of an estimated 4.5-5.5% will likely provide support to the share price.

In  line.  MSM’s  FY14  net  profit  was  in  line  with  our  expectations,  but above  consensus  estimates,  making  up  103%  and  106%  of  our  and consensus  FY14  estimates,  respectively.  MSM  did  not  declare  a  final dividend, although we believe it could declare another 14 sen at a later stage,  bringing  FY14  total  net  DPS  to  24  sen  (similar  to  FY13),  which would translate in to a net payout of 65% and net yield of 4.8%.     Key  briefing  highlights:  i)  strong recovery  in  sales  volume  in  4Q14  -total  sales  volume  rose  6.5%  in  FY14  (from  +2.2%  in  9MFY14),  as domestic  market  share  grew  to  64%  (from  57%  in  FY13);  ii)  import permit and Thai smuggling issues still prevalent, although management hopes  for  some  resolution  soon;  and  iii)  low  raw  sugar  prices  the sweetener  -  raw  sugar  prices  remain  low  at  USD0.14-15/lb,  and  MSM has  acquired  100%  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.

Forecasts.  After  adjusting  for  higher  sales  volumes  and  the  weakerMYR/USD  exchange  rate,  our  FY15  earnings  forecast  was  relatively unchanged, while we tweak our FY16 earnings forecast higher by 2.2%. We also introduce our FY17  earnings  forecast.  We  estimate  that every MYR0.10/USD change in exchange rate would affect earnings negatively by 2-4% per annum.

BUY  maintained.    Although MSM still faces the issues of sugar import permits and smuggled, cheaper Thai sugar, we believe the absence of along -term contract (LTC)  in 2015 and the current low raw sugar prices could bode well for margins. Our TP is relatively unchanged at MYR5.75 (from  MYR5.74),  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 4.5-5.5% per annum. Maintain BUY.

Key briefing highlights
Strong  recovery  in  sales  volume  in  4Q14.  MSM  recorded  total  sales  volume  of +6.5% in FY14  (up from +2.2% in  9MFY14), coming mainly from stronger industrial sales  (+51.1%), though  offset by lower  domestic  (-9.1%)  and  lower  export  sales  (-5.5%).  This  was  partly  due  to  some  reclassification  of  MSM’s  customers  from domestic to industrial as well as improvements in its market share of 64%  (from 57% in FY13). Management highlighted that this was driven by some promotions and pice discounting done during the quarter, which may not be repeated in FY15. For FY15, management expects  sales volume growth to revert to low single-digits, of less than +2%. As this  is higher than our originally projected  -5% decline, we are  revising our forecast to reflect a +1% growth instead for FY15, followed by an unchanged 3 -4% growth for FY16-17.

Import  permit  and  Thai  smuggling  issues  still  prevalent.  MSM’s  6.5%  volume growth  in  FY14  is  admirable,  given  the  fact  that  the  Malaysian  sugar  industry continues to face two issues  -  the  sugar import permit  issue which affects industrial sales and smuggled Thai sugar which affects retail domestic sales. As at end-2014, there were still 32 import permits issued, while Thai sugar imports are being priced a t MYR2.34/kg  (vs  Malaysian  recommended  retail  price  of  MYR2.68).  Management expects  that  the  total  volume  of  imported  sugar  from  the  import  perm its  and smuggled  Thai  sugar  is  around  270,000-300,000  tonnes  per  annum,  which comprises about 20-22% of total domestic consumption. Management continues to hope for a resolution on the import permit issue by 1H15, which could come about with a change in government policy. As for the smuggled Thai imports, this issue is more  difficult  to  resolve,  unless  a  severe  crackdown  is  instigated  by  the  customs department.

Low raw sugar prices the sweetener.  Going into FY15, we expect MSM’s earnings growth to be driven largely by the low raw sugar prices. We estimate MSM’s average raw sugar prices in FY14 to be about USD0.22/lb, as it had to use the LTC raw sugar which  was  priced  at  USD0.26/lb.  For  FY15,  MSM  has  purchased  all  its raw  sugar requirements  already,  at  lower  prices,  although  management  did  not  disclose  the pricing. Raw sugar is currently priced at USD0.145/lb. We have assumed a raw sugar cost of USD0.166/lb for FY15. We highlight, however, that as MSM imports its raw sugar in USD, it would also face the impact of the weakening MYR. We understand MSM  did  not  hedge  its  USD  rate,  only  the  price.  We  estimate  that  every MYR0.10/USD  change  in  exchange  rate  would  affect  its  earnings  by  2-4%  per annum. We have also adjusted our exchange rate forecasts to be in line with our inhouse  estimates,  projecting  MYR3.50/USD  for  FY15,  and  MYR3.40/USD  for  FY16(from MYR3.30/USD). Management expects prices of raw sugar to fall slightly by Mar2015,  but  to  pick  up  again  a  few  months  after.  As  such,  management  is  already exploring the possibility of buying forward some of its FY16 raw sugar requirements.

Forecasts and risks
After adjusting for: i) higher sales volumes and weaker MYR/USD exchange rate, our FY15 earnings forecast was relatively unchanged, while we tweak our FY16 earnings forecast higher by 2.2%. We also introduce our FY17 earnings forecast. The  key  risks  to  our  earnings  forecasts  include:  i)  a  slowdown  in  domestic  sugar demand, ii) a spike in raw sugar prices, and iii) a weak MYR against the USD.

Investment case
Although MSM still faces the issues of  sugar  import permits and smuggled,  cheaper Thai sugar, we believe the absence of an LTC in 2015 and the current low raw sugar MYR5.74),  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 4.5-5.5% per annum. Maintain BUY.

Source: RHB