This article first appeared in The Edge Financial Daily on July 5, 2019

MSM Malaysia Holdings Bhd
(July 4, RM1.42)
Maintain sell with a lower target price (TP) of RM1.07: We are now expecting MSM Malaysia Holdings Bhd to be in a loss-making position in financial year 2019 (FY19) and FY20 before returning to being profitable in FY21 in view of the current escalated competition in the domestic market from the liberalisation of the sugar industry and oversupply of sugar which might persist into FY20.

Thus, we are lowering our assumptions for both average selling prices (ASP) of refined sugar and sales volumes.

We derived at a new TP of RM1.07 by pegging the forecasted FY20 book value per share of RM2.14 at its two-year low historical price-to-book ratio of 0.5 times.

To also note that we are changing our valuation method to price-to-book (previously price-earnings) to reflect the negative earnings trajectory in the next two years.

The prolonged oversupply of refined sugar in the domestic market from which MSM derives around 90% of its sales revenue presents a challenging outlook for the group. This is reflected by the declining sales revenue due to the continuous downtrend in its ASP of refined sugar and dwindling sales volume.

The situation is further exacerbated by the recently issued approved permit (AP) by the government to eight food and beverage manufacturers in Sarawak, allowing it to import foreign sugar of up to 60% of their required usages.

Consequently, we opine that MSM would be lowering its ASP of refined sugar to remain competitive in the domestic market. Coupled with expected higher refining costs, we are more likely to observe a further deterioriation in its profit margin. Should there be further liberalisation (that is AP issuance) to other states, we believe MSM’s earnings trajectory would be in dire straits.

Meanwhile, the implementation of sugar tax on soft drinks and juices with a 40 sen tax per litre on July 1 might be additional dampening factor for MSM. — MIDF Research, July 4