Less than sweet outlook for MSM

In a statement, MSM president and CEO Mohamad Amri Sahari said the group

PETALING JAYA: MSM Malaysia Holdings Bhd’s earnings will continue to be impacted by the weakening ringgit and higher raw sugar price in the fourth quarter.

Yesterday, the group that controlled 65% market share of the country refined sugar supply reported a deep plunge in net profit for its third quarter ended Sept 30.  

MSM third quarter of financial year 2016 (3QFY16) net profit to fall by 64% to RM23mil, on a year-on-year (YoY) comparison.

CIMB Research said on Tuesday that despite registering a 16% higher sales value YoY, it could not offset the elevated raw sugar costs which rose by 34% YoY and higher effective tax rate of 29%. Enter the fourth quarter, the research house projects the profit margin for MSM’s domestic segment to remain poor.

However, 3QFY16 revenue grew by 16% YoY primarily due to higher domestic sugar sales volumes and average selling price of 44% and 7%, respectively. Worth to be noted, the industry’s sugar sales volumes fell 21% as customers in this segment switch to buying from wholesalers at more attractive selling prices of RM2,680 per tonne instead of directly from MSM at RM3,000 per tonne.

Starbiz reported yesterday that MSM has nevertheless appealed to the government to increase the retail ceiling price of refined sugar by 20% to 30% due to the escalating raw sugar prices.

“We are cutting our net profit forecasts for MSM by 31-44% for FY16-18 to reflect higher raw sugar costs and shifting of sales volumes from the more profitable industries segment to the less profitable domestic segments.

“We are assuming that retail sugar price will remain unchanged as there has been no clarity as to when the government will hike the ceiling price for sugar, which last revised on 26 Oct 2013,” said CIMB Research.

The research house has downgraded its recommendation on MSM to “reduce” and also revised the target price downward to RM3.50.

Meanwhile, Maybank IB Research said while margins will remain compressed in the second half of financial year 2016 (2HFY16), MSM’s half-on-half (HoH) earnings should improve after taking into account the recent selling price adjustments to the industrial and wholesale categories.

Maybank IB Research indicated that heavy capital expenditure by MSM can be expected going forward.

“With the construction of its US$259mil worth third refinery in Tanjung Langsat, Johor, which will be completed by early 2018, MSM will see heavy capex in the medium term.

“With the new plant, MSM plans to double its annual refining capacity to 2 million metric ton,” said Maybank IB Research in its report.

While the research house has maintained its earnings forecasts, it expects MSM’s FY16-17 net dividend yield to fall to 3.1%-3.3% from 5.2% in FY15, due to projected lower profitability and possibly higher capex requirements.

Maybank IB Research reiterated its “sell” call on MSM’s shares, with an unaltered target price of RM4.22.