MSM Malaysia Holdings Bhd
(June 10, RM5.35)
Upgrade to buy with higher target price of RM6.02: MSM is in the final stages of approval of a new sugar refinery, which will be in Port of Tanjung Pelepas, Johor. As soon as the approval process is completed and the design finalised, construction of the refinery will immediately begin.
It will take about 22 to 24 months to complete. The new plant is targeted to be fully operational by the third quarter ending September of financial year 2017 (3QFY17). This will be the company’s third refinery.
The capital expenditure for the refinery will be approximately RM250 million and it will employ high-efficiency technologies.
Upon completion, MSM will be able to process at least two million tonnes of sugar annually, almost double its current production.
The cost of production could also be reduced by approximately 25% to 30% of its current cost.
Management has also guided that there have been talks about a possible arrangement with a local electricity producer to offtake MSM’s excess electricity from the boilers.
If the arrangement is successful, the sale of excess electricity produced will generate additional income of approximately RM80 million per annum.
However, MSM guided that this arrangement will require the company to build an additional boiler at a cost of RM11 million to meet the stipulated supply agreement.
Management guided that it intends to enter the upstream market as part of plans to diversify the company’s income stream, apart from expanding the current middle and downstream segments.
This will mostly be done by way of mergers and acquisitions and strategic alliances in order to gain more geographic presence.
MSM noted that it will hold a majority stake if it chooses to acquire another firm.
Currently, the company is already in advanced negotiations to acquire two upstream firms from Indonesia.
We are maintaining our earnings estimates as we have previously revised our FY15 earnings forecasts upwards by 12.8%. — MIDF Research, June 10
This article first appeared in The Edge Financial Daily, on June 11, 2015.