This article first appeared in The Edge Financial Daily on October 24, 2019
MSM Malaysia Holdings Bhd
(Oct 23, 96.5 sen)
Upgrade to hold with an unchanged target price (TP) of RM1.05: We recently hosted a site visit to MSM Malaysia Holdings Bhd’s Johor refinery and obtained an update on its operational outlook. The group has secured a foreign customer for its liquid sugar products with maiden orders of 10,000 tonnes coming in during the fourth quarter of 2019 (4Q19).
We believe the new value-added products including premixes will begin to contribute materially to MSM’s earnings from financial year 2020 (FY20), partially addressing the Johor refinery’s low utilisation rate of about 20%. A recovery in sugar prices could also begin to catalyse an earnings recovery next year. We upgrade the stock to a “hold” (from “sell”), after its recent share price decline, with an unchanged 12-month TP of RM1.05.
We gathered that the new Johor refinery is running at 18% to 20% of its 1.25 million tonnes of production capacity at present — a dip from a 20% to 30% utilisation rate in 2Q19 — due to weakness in raw sugar prices in the first nine months of 2019 which suppressed the global premium for refined sugar and consequently the profitability of export sales.
While MSM is likely to post a weak set of results quarter-on-quarter for 3QFY19, we foresee losses narrowing progressively for 4QFY19 on: i) an uptick in global sugar prices favouring export sales prospects; ii) a local average selling price (ASP) revision due to abating price competition; and iii) maiden orders for MSM’s high-margin liquid sugar and sugar premixes from October.
Nevertheless, MSM continues to face business uncertainties in its long-term outlook, such as potential liberalisation of the local sugar industry and public campaigns against sugar consumption due to rising obesity rates in Southeast Asia. Given the inherent structural challenges, we regard the pivot towards value-added products as crucial to the group’s evolution. Amid a choppy industry landscape, MSM is still considering various corporate exercise proposals and strategic collaborations.
We revise our earnings estimates for FY19 to FY21 by -23%/+17%/+50% respectively to incorporate the factors mentioned above as well as cost-cutting measures and likely weakness in the ringgit. Upside/downside risks include: i) a sharp ASP recovery/fall; ii) a pullback from/worsening of the domestic sugar supply glut; and iii) a rally/deterioration in export demand. — Affin Hwang Capital, Oct 23