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This article first appeared in The Edge Financial Daily, on March 3, 2017.

 

MSM Malaysia Holdings Bhd 
(March 2, RM4.65)

Upgrade to hold with a higher target price (TP) of RM4.33: According to a local Chinese newspaper report, the government has raised the retail price of sugar in the country from RM2.84 per kg to RM2.95 per kg. There has not been any official confirmation. However, it quoted Federation of Sundry Goods Merchants Association of Malaysia president Hong Chee Meng as saying that this price increase was communicated to him by the domestic trade cooperatives and consumerism ministry via a text message. 

The last time Malaysia adjusted sugar prices was during Budget 2014 when the sugar subsidy of 34 sen per kg was scrapped, resulting in an increase in the ceiling price of coarse and fine sugar of 34 sen per kg to RM2.84 per kg. The latest price adjustment of 11 sen per kg, represents an increase of 3.8% in the selling price for retail sugar. 

It was reported that the increase in price was to reflect the higher raw sugar costs. Raw sugar prices have climbed from 19 US cents per pound on Oct 25, 2013 to 19.38 US cents per pound currently, while the ringgit has weakened from 3.16 against the US dollar to 4.45 against the US dollar currently. Based on this, we estimate that raw sugar prices have risen by approximately 57 sen per kg or a 44% jump, since the last price adjustment. 

The hike in raw sugar prices does not come as a surprise to us as it was widely reported that the refiners have been appealing to the government for higher prices as their refining margins have been squeezed by higher raw sugar costs. We understand MSM Malaysia Holdings Bhd has asked for a 20% to 30%, or 56 sen to 85 sen per kg rise in the ceiling price of sugar of RM2.84 per kg from the government. As such, the 11 sen increase falls short of its request. 

We are raising our financial years 2017 to 2019 (FY17 to FY19) forecast net profit estimates by 13% to reflect the higher average selling price (ASP) adjustments in retail sugar prices. In its FY16, MSM reported a 24% increase in domestic sales volumes to 491,000 tonnes as its customers shifted their purchases to the domestic segment from the industrial segment to enjoy the more favourable selling prices in the domestic market. This higher ASP for domestic retail sugar is partially offset by concerns that the higher prices will lead to lower demand for sugar. 

We raise our TP which is based on 15.5 times forward price-earnings ratio to RM4.33 to reflect the higher earnings estimates. Overall, we are more positive on MSM following the sugar price revision. This, coupled with improving earnings prospects due to a series of ASP adjustments for sugar, lead us to raise our rating to a “hold” from “reduce”. Key upside risk is higher domestic sugar prices, while downside risk is higher raw materials costs. — CIMB Research, March 1

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