MSM’s 3Q gross margin dampens on higher raw sugar cost

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MSM Malaysia Holdings Bhd
(Nov 20, RM4.94)
Retain “hold” with a target price of RM4.90:
MSM Malaysia Holdings booked RM48 million in net profit in the third quarter of financial year 2014 (3QFY14) (-35% year-on-year [y-o-y]; -39% quarter-on-quarter [q-o-q]), taking its nine months of FY14 (9MFY14) profit to RM182 million (-20% y-o-y). This is in line with 77% of our and consensus full-year estimates.

Its 3QFY14 revenue grew 3% y-o-y to RM560 million, as a 4% increase in sales volume was tempered by a 1% drop in average selling price (ASP). Gross margin fell to 16% in 3QFY14 (-9 percentage points [ppts] y-o-y; -8 ppts y-o-y) due to higher raw sugar cost. MSM took delivery of three shipments of raw sugar under the more expensive long-term contract (LTC) arrangement in the quarter. This nudged up the share of LTC sugar to about 50% of its requirement in the quarter (vs 40% in a typical quarter).

MSM will be free to acquire its own raw sugar once the current LTC expires. This could introduce volatility to its cost structure, but margins can only get better from here.The retail sugar price is set based on the cost of raw sugar of 26 US cents/lb (80 sen) vs recent raw sugar prices of 15 to16 US cents/lb.  Gross margins will improve if the current ASP and raw sugar price are maintained next year.

The proposed sugar refinery at Port of Tanjung Perlepas, Johor could help MSM to turn into a strong regional player. The plant will be able to process two million tonnes of sugar per annum and processing cost is expected to be 30% to 35% cheaper than the group’s current cost.

We retain our “hold” rating with a TP of RM4.90, based on 14 times FY15 forecast earnings per share (its mean price-earnings ratio valuation since listing). The share price will be supported by 4% to 5% dividend yield. — AllianceResearch, Nov 20

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This article first appeared in The Edge Financial Daily, on November 21, 2014.