• We downgrade MSM to a HOLD call with a TP of RM1.10 (from RM3.18 previously), based on FY25F BVPS of RM2.22, pegged to a 0.5x PBV ratio.

• We anticipate a challenging 3Q24, as NY11 price levels remain unchanged from 2Q24. However, the recent increase in NY11 price due to a fire outbreak in Brazil may increase the average selling price (ASP) and provide better earnings visibility for 4Q24.

• To recap, MSM’s recorded a core net loss of RM14.1mn in 2Q24, primarily dragged by the lower export sales volume, lower ASP, and higher input costs due to the hedging loss on raw sugar (NY11).

Easing in NY11 – the Culprit to MSM’s Loss in 2Q24

MSM fell into the red in 2Q24, recording a core net loss of RM14.1mn (after excluding the EI, including an onerous provision of RM18mn), despite two consecutive profitable quarters (4Q23 and 1Q24). As a result, MSM’s 1H24 core net profit missed our estimates, accounting for only 4% of the full-year forecast. The disappointing performance in 2Q24 was mainly driven by: 1) a significant drop in export sales volume, down approximately by 40% QoQ to 37,000 MT in 2Q24 from 62,000 MT in 1Q24, 2) a decline in ASPs due to softening of NY11 prices in 2Q24, and 3) higher input cost resulting from a hedging loss of NY11. Despite receiving a government subsidy of RM24mn per month for 1kg CGS/FGS, MSM was unable to offset the hedging losses in the Exports segment.

Mixed Results Expected in 2H24

As the NY11 in 3Q24 traded at a similar level with 2Q24 (USD19.4c/lb vs. USD19.6c/lb), we expect MSM’s 3Q24 earnings to remain challenging due to anticipated lower export volume, in our view. Notably, the 1H24 export volume represents only 33% of management’s full-year export sales target of 300,000 MT for FY24F. However, with NY11 rising to USD23.3c/lb following the fire outbreak in Sao Paulo, Brazil, we anticipate a hedging gain in 4Q24, which should translate into better earnings prospects for MSM. Additionally, with the upcoming festive season in 4Q24 and 1Q25, we expect higher sales volumes as retailers and wholesalers typically stock up ahead of Christmas and Chinese New Year.

Earnings Revision

We revised our FY24F/FY25F core net profit forecasts lower by -87%/-85% to RM27.7mn and RM56.5mn, respectively, as we revisit our assumptions for sales volume and production costs. Nevertheless, we anticipate a significant improvement in FY25F earnings (+104% YoY) to RM56.5mn, driven by higher NY11 prices following the fire outbreak in Brazil, with a higher ASP and a better hedging position on NY11. Additionally, MSM could benefit from a strengthening Ringgit, as raw sugar is 100% imported in USD.

Downgrade to HOLD with a new TP of RM1.10 (from RM3.18)

We downgrade our call on MSM to HOLD with a new TP of RM1.10 (from RM3.18) based on FY25F BV/PS of RM2.22, pegged to a 0.5x P/BV. We changed our valuation methodology from PER to PBV due to the lack of clear earnings visibility caused by volatility in commodity prices, particularly in relation to MSM’s hedging strategies.

Impact of Fluctuation of Raw Sugar Price (NY11) to MSM

Raw sugar price (NY11) traded above USD20c/lb from the beginning of 2023, peaking at a sky-high price of USD28c/lb in Nov 2023. This surge was driven by two key factors: 1) the El Nino weather phenomenon, which caused production shortfalls in major sugarcane-producing countries; India and Thailand, the largest global exporters of raw sugar after Brazil, and 2) the sugar export ban by India.

Thanks to improvement in NY11 performance and hedging gains in 4Q23 and 1Q24, MSM reported higher industry and export sales volume (Table 2). However, in 2Q24, with the average NY11 price declining to USD19.6c/lb, MSM experienced hedging losses that impacted its export sales, leading to a 40% QoQ and 30% YoY drop in export volumes. This contributed to a core net loss of RM14.1mn for the quarter.

Looking ahead, NY11 prices may exhibit bullish trends, supported by the recent massive fire outbreak in Central South Brazil, which affected up to 80,000 hectares of sugarcane plantations. Additionally, the International Sugar Organisation (ISO) forecasts a larger sugar deficit for 2024/25F, estimated at 3.58mn MT, compared to 200,000 MT in 2023/24F. Due to the excessive heat, drought, and fire outbreaks in Brazil, CONAB - Brazil’s crop agency has revised its sugar production estimate downward to 42mn MT from the initial forecast of 42.7mn MT.

2Q24 Loss Due to Export Sales and Lower Average Selling Price

MSM's 2Q24 financial results were disappointing, with core net loss of RM14.1mn (exEI, including an onerous provision of RM18mn). This marked a significant decline after two profitable quarters in 4Q23 and 1Q24. Consequently, MSM's core net profit for 1H24 only accounted for 4% of our full-year forecast. The weak performance in 2Q24 was primarily driven by challenges in the export market, which saw a 40% QoQ drop in sales volume, falling from 62,000 MT in 1Q24 to approximately 37,000 MT in 2Q24. Additionally, average selling prices declined due to the easing of NY11 prices, and higher input costs were exacerbated by hedging losses related to NY11. Despite receiving government subsidies of RM24mn per month for 1kg CGS/FGS, MSM was unable to mitigate the impact of these losses in the export segment.

Outlook: 2H24 to be Mixed, while Improvement Expected in FY25F

We expect MSM’s performance in 3Q24 will remain challenging, as the average price level of NY11 is expected to be similar to that in 2Q24. Consequently, we believe this will negatively impact MSM’s export sales volume for 2024F, potentially leading to a shortfall against management’s export target of 300,000 MT.

However, with NY11 prices rising to USD23.3c/lb due to the fire outbreak in Brazil, we believe MSM has the potential for a turnaround in FY25F, driven by a higher average selling price and an improved hedging position on NY11. Furthermore, MSM could benefit from a strengthening Ringgit, as raw sugar is 100% imported and denominated in USD.

Earnings Revision

We have reduced our FY24/25F earnings forecasts by 87% and 85%, respectively, reflecting the expected decline in export sales volume and lower average selling prices due to moderated NY11 performance.

Downgrade to HOLD call with a TP of RM1.10 (from RM3.18)

We downgrade our recommendation on MSM to a HOLD, with a TP of RM1.10, based on FY25F’s BVPS of RM2.22, that is pegged to a 5-year average P/BV ratio of 0.5x. We changed our valuation methodology from PER to P/BV due to a lack of earnings visibility and fluctuations in commodity prices. We anticipate that MSM’s earnings will improve in FY25F, driven by: i) higher ASPs for export products, reflecting increased NY11 prices; ii) a better hedging position on NY11; and iii) potentially lower input costs, benefiting from a strengthening Ringgit.

Source: BIMB Securities Research - 30 Sept 2024