Tan Sri Syed Mokhtar Albukhary, Malaysia's low-key business mogul, is known for his strategic ventures across various industries. His latest proposal to take over 51% of FGV Holdings Berhad's sugar refinery unit, MSM Malaysia Holdings Bhd (MSM), has triggered a storm of debates.

FGV, whose largest shareholder is the Federal Land Development Authority (FELDA) with an 81.9% stake, is said to be less enthusiastic about this takeover. However, if successful, Syed Mokhtar will consolidate his control over two vital commodities in Malaysia - sugar and rice, causing some quarters to express concern about the potential monopolization of the country's refined sugar industry.

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Sweetening the Deal

It is worth noting that Syed Mokhtar already controls the other large sugar refiner in Malaysia, Central Sugars Refinery Sdn Bhd (CSR), through his private vehicle Perspective Lane (M) Sdn Bhd. This company also owns Padiberas Nasional Bhd (Bernas) - the nation's sole rice distributor.

There's more than just sugar on the table. Syed Mokhtar's takeover bid may include injecting CSR into MSM in exchange for a stake. If this bid succeeds, he could further inject more assets into the merged entity, thereby gaining control of the company and the prime land in Shah Alam that CSR's plant currently occupies. The plant sits on land worth over RM1 billion in gross development value.

A Pattern of Play

This potential move mirrors Syed Mokhtar's business strategies in the past. He has frequently used his assets to secure control over companies. Two prime examples include his acquisition of a 19.9% stake in MMC Corp Bhd from government-linked investment company Permodalan Nasional Bhd, and his purchase of a 15.8% block in DRB-Hicom Bhd from the family of the late Tan Sri Yahya Ahmad.

Syed Mokhtar consolidated his control over DRB-Hicom by injecting his 70% stake in Bank Muamalat Bhd into the company in a deal valued at RM1.01 billion. Besides Bank Muamalat, he also injected another company that handled the operations and maintenance work for the Tanjung Bin power plant in Johor for RM720 million. The result? His stake in DRB-Hicom shot up from 15.8% to over 50%.

The Sour Side of Sugar

It is undeniable that MSM's recent financial performance raises some eyebrows. The company recorded a net loss of RM178.1 million in the financial year ended December 31, 2022, due to high input costs, with raw sugar making up 80% of the cost. Yet, CSR has proven profitable in the last five financial years, recording a net profit of RM120.88 million for the financial year ended December 31, 2022.

Anticipating the Outcome

Syed Mokhtar's keen interest in MSM isn't a surprise. He has made similar takeover attempts in the past, proposing a merger of MSM and CSR in 2018 and expressing interest in FGV via an injection of plantation assets into the company in 2020. However, it seems that his success may depend on the government's stance on monopoly, given the recent efforts by Prime Minister Datuk Seri Anwar Ibrahim to break up monopolies and establish a more competitive industry landscape.

Whatever the outcome of Syed Mokhtar's takeover bid for MSM, the future promises a thrilling and transformative period for the Malaysian sugar industry. Investors should keep a close watch on these unfolding events, as they will likely have a significant impact on the industry and the Malaysian economy as a whole.​

A Sugary Overview

Currently boasting a market capitalization of RM2.5 billion, MSM trades at a forward PE ratio of 16.7x for FY18F and 16.2x for FY19F. However, based on an FY18F PE of 20x, our valuation leads us to a fair value of RM4.30/share. To give some historical context, MSM was listed back in 2011 at an institutional IPO price of RM3.50/share and a retail IPO price of RM3.38/share.

While the present figures show promise, the proposed takeover by tycoon Tan Sri Syed Mokhtar Albukhary elevates MSM's potential. If FGV agrees to hold shares in the special-purpose vehicle (SPV) created for the proposed merger between MSM and Central Sugar Refinery (CSR), the earnings base could increase significantly. This is because the SPV would house both MSM and CSR, possibly making it an associate or joint venture.

The Sweet Spot of MSM

In its peak year, FY15, MSM contributed a whopping 68.9% to FGV's pre-tax profit. However, the contribution dropped significantly to just 0.5% in FY17. This inconsistency highlights the need for a transformative strategy - a strategy that Syed Mokhtar's proposed takeover could provide.

Syed Mokhtar is likely to hold a controlling stake in the SPV, raising the potential of a well-calibrated leadership that could drive forward MSM's profitability. The new business strategy could enhance the company's market position and increase shareholder value.

Navigating Potential Risks

Like every investment, it's essential to consider potential risks. The projection for FY18F sees MSM swinging back into the black with a net profit of RM151.1 million, a significant improvement compared to the net loss of RM32.6 million in FY17. This positive swing is primarily due to a projected drop in the cost of raw sugar.

However, there is a significant risk looming on the horizon: the new sugar refinery in Tanjung Langsat, slated for commissioning in the 2HFY18. With a production capacity of one million tonnes per year, finding enough off-takers for the new sugar refinery may pose a challenge for MSM.

In conclusion, the potential takeover of MSM by Tan Sri Syed Mokhtar Albukhary presents a fascinating juncture in the evolution of Malaysia's sugar industry. The move could redefine the landscape and strategically consolidate two key commodities - sugar and rice - under the control of one businessman. The prospective synergies that could emerge from integrating MSM with Syed Mokhtar's existing assets, such as CSR, offer enticing possibilities for transformation and resurgence.

However, this exciting prospect is tempered by significant uncertainties, from meeting the demands of the new Tanjung Langsat sugar refinery to navigating a political environment increasingly wary of monopolies. The outcome will inevitably impact not only the parties directly involved, but also the broader Malaysian economy.

The next chapter in this saga promises to be a captivating one. As the sugar industry stands on the precipice of potential transformation, investors are encouraged to remain vigilant. The unfolding narrative of MSM and its place within the Malaysian sugar industry is more than just the tale of one company. It's a story of economic shifts, the power of strategic consolidation, and the sweet (and sour) complexities of industry dynamics. Stay tuned, because this is a story that is sure to influence your next investment move.

It is my hope that the information provided in this article will be useful for all investors. My intention is simply to share information about a company that has the potential to bring profit to investors. Ultimately, any decision made is up to the individual.

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