This article first appeared in The Edge Financial Daily on June 18, 2019

MSM Malaysia Holdings Bhd
(June 17, RM1.46)
Maintain reduce with an unchanged target price of RM1.39: According to Domestic Trade and Consumer Affairs Deputy Minister Chong Chieng Jen, the government will not reconsider its decision to grant sugar import permits to food and beverage (F&B) manufacturers in Sarawak. He said a little competition in the sugar industry would do more good than harm to the country. Further, Pakatan Harapan’s general policy is to encourage more competition, reduce the cost of doing business and enhance efficiency in all sectors, he said, adding that in a globalised market, no country can afford to have a protectionist policy that lasts forever.

On June 12, MSM Malaysia Holdings Bhd and Central Sugars Refinery Sdn Bhd urged the government to reconsider its decision to grant sugar import permits to eight Sarawak-based F&B manufacturers, as it would force the domestic sugar refining industry to cut costs besides having negative long-term impacts. The refiners said in the short term, sugar imports will only force the domestic industry to cut costs to survive. This, they also highlighted, includes reducing the security stock cover for the country and closing loss-making factories to reduce costs and capacity. They added that domestic sugar refiners hold sugar stocks lasting two to three months, valued at between RM180 million and RM210 million, resulting in an annual cost of RM7 million to RM20 million for refiners.

We are unsurprised by the government’s decision as it has been looking at different ways to control or lower prices of essential goods to address concerns over the cost of living. According to Chong, the current international price of raw sugar is at RM1.30 to 1.40 per kg and refined sugar at RM1.80 per kg. Despite the low international refined sugar price, F&B manufacturers in Sarawak have been purchasing sugar at a much higher RM2.70 per kg from the two said Malaysian refiners. As a result, the government has allowed Sarawak F&B players to import up to 60% of their sugar requirements.

We read this as a negative development for MSM, as the government could expand its plans to issue import permits for refined sugar to F&B players in other states locally. This will exert further pressure on the sales volume and profit margin that MSM is currently achieving due to lower average selling prices (ASPs) for its refined sugar. We estimate for every RM10 per tonne reduction in ASP by MSM, it could reduce the group’s revenue by RM8 million and profit by a similar quantum, if MSM is unable to cut costs. — CGSCIMB Research, June 14