Prospects looking sweeter for MSM on higher prices

CGSCIMB upgraded the MSM counter from reduce to hold, with a higher target price of 88 sen, on the back of improving earnings prospects.

PETALING JAYA: Prospects are starting to look sweeter for MSM Malaysia Holdings Bhd following the increase in its average selling price (ASP) for its wholesale and retail sugar products in October last year.

CGSCIMB Research said the worse could be over for the sugar producer as it will be banking on its higher ASP and lower costs to reduce losses in FY20F, coupled with the fact that it has used up all its raw sugar contracts that were locked in at high prices.

The research house gathered that MSM raised the ASP achieved for wholesale sugar to around RM2.45 per kg, higher than RM2.32 per kg that was achieved in FY19.

It lowered the FY20F net loss projection for MSM from RM69mil to RM43mil to reflect better margins for its domestic market.

“We also gathered that the group has also fully-used-up the raw sugar (NY#11) and freight premiums that were locked in at higher-than-current-market pricing two years ago.

“MSM estimated that this had elevated its raw sugar costs for FY19 by RM90m, ” it said in a research note yesterday.

CGSCIMB upgraded the counter from reduce to hold, with a higher target price of 88 sen, on the back of improving earnings prospects.

MSM’s fourth quarter results for the period ended Dec 31,2019 saw its net profit dipping further into the red from RM10.35mil in the fourth quarter of 2018 to RM40.28mil, which it attributed to lower ASP, higher refining cost and higher finance cost incurred.

Its revenue for the quarter dropped 2.79% year-on-year (y-o-y) to RM516.04mil.

On a full year basis, MSM reported a net loss of RM299.77mil as compared to a net profit of RM35.66mil in 2018 while its revenue dropped 9.37% to RM2.01bil.

CGSCIMB said intense competition in the domestic market led to MSM’s ASP sliding 8% y-o-y to RM2.32 per kg, which was below the potential pricing it could have achieved at RM2.69 per kg, based on the retail ceiling price for refined sugar of RM2.85 perkg.

Coupled with the losses from the group’s Johor refinery and high raw material costs, this led MSM to post a core net loss of RM140mil for FY19.

Affin Hwang Capital Research maintained its hold rating on MSM at a lower target price of 83 sen, saying that the upside potential was looked limited at this juncture.

It trimmed the company’s 2020-21E earnings by 3% to 7% in light of the cautious macro outlook domestically and externally due to the coronavirus disease (Covid-19) which may disrupt the end-consumption of sweet products.

“We expect ASPs for MSM to fare better in 2020. Moving ahead, on top of existing operations, the group will look to focus on expanding its range of value-added or downstream products which should bode well in further lifting overall product ASP, ” Affin Hwang said.

MIDF Research is of the view that MSM’s Johor refinery will continue to negatively impact the group’s well-being with higher refining and finance costs.

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