MSM Malaysia Holdings Bhd
(Aug 20, RM4.81)
Maintain buy with an unchanged fair value of RM5.70: Our fair value of RM5.70 per share implies a financial year 2016 forecast (FY16F) price-earnings ratio (PER) of 13.9 times. MSM Malaysia Holdings Bhd is a defensive consumer company. Demand for refined sugar is more stable compared with other consumer discretionary products.

MSM’s first half ended June 30, 2015 (1HFY15) results were above consensus estimates and our expectations. We have raised MSM’s FY15F earnings per share by 5.4% to account for a lower cost of raw sugar.

MSM did not declare any dividend in the second quarter ended June 30, 2015 (2QFY15). We believe that the group would be declaring an interim dividend in 3QFY15. We have forecast a gross dividend per share of 25 sen for FY15F (FY14: 24 sen), which implies a yield of 5%.

Underpinned by the lower cost of raw sugar, MSM’s net profit climbed 11.2% year-on-year (y-o-y) to RM150.2 million in 1HFY15. MSM’s gross profit margin improved from 21% in 1HFY14 to 24.5% in 1HFY15. The fall in price of raw sugar compensated for the depreciation of the ringgit against the US dollar.

According to Bloomberg, the US dollar appreciated by 11.5% from US$1:RM3.2663 in 1HFY14 to US$1:RM3.6405 in 1HFY15. On the other hand, average price of raw sugar plummeted by 25.4% from US$0.1858 per pound in 1HFY14 to US$0.1386 (RM0.5724) per pound in 1HFY15.

Revenue was flat y-o-y in 1HFY15. MSM recorded a 3% y-o-y increase in the sales volume of refined sugar in 1HFY15. However, this was offset by lower selling prices. We estimate that average selling price of refined sugar to the domestic market declined 4.8% y-o-y in 1HFY15.

Sales volume of sugar to industrial customers expanded 43.3% y-o-y in 1HFY15 while domestic distributors bought 15% less sugar. Exports of refined sugar declined 23.6% y-o-y in 1HFY15. Industrial customers accounted for 45% of MSM’s sales volume in 1HFY15, while domestic distributors accounted for another 39%.

Average selling price of refined sugar to industrial customers slid 0.7% y-o-y in 1HFY15, while domestic distributors enjoyed selling prices which were 3.3% weaker on average. Average selling price of sugar exports rose 2.8% y-o-y in 1HFY15.

Comparing 2QFY15 against 1QFY15, sales volume of refined sugar surged by more than 15% driven by festive demand. MSM’s balance sheet is still healthy although it swung from net cash of RM147.8 million as at end-March 2015 to net debt of RM108.7 million as at end-June 2015. Net gearing was 5.4%. — AmResearch, Aug 20

This article first appeared in digitaledge Daily, on August 21, 2015.