Refinery under-utilisation worries for MSM Holdings

PETALING JAYA: Sugar refiner MSM Holdings Bhd’s lower-than-expected first-quarter financial year 2022 (1Q22) results, particularly losses at its refinery in Johor, are a key concern, say analysts.

The group recorded a core net loss of RM33mil in 1Q22 due to shutdowns and improvement works at its Johor refinery, coupled with higher refining costs.

CGS-CIMB Research in its latest report said MSM is forecast to be loss-making in financial year 2022 (FY22).

This was owing to the under-utilisation of its Johor refinery and the higher raw sugar and refining costs.

“Hence, we have lowered our target price (TP) on the stock to 62 sen to reflect our concerns over rising costs and the longer time needed to turn around its Johor refinery,” it noted.

The research house said that MSM’s 1Q22 core net loss was the third consecutive quarter of losses for the group.

It was also below CGS-CIMB Research and consensus expectations of a full-year FY22 core net profit of RM43mil and RM75mil, respectively.

“This is also in stark contrast to 1Q21’s core net profit of RM20mil, owing mainly to higher raw sugar and refining costs, as well as lower utilisation rates due to an annual plant shutdown at its Johor refinery.”

The group’s reported net loss was also lower, at RM28mil, as the group recorded a reversal of impairment on inventories and financial assets of RM2.6mil and unrealised gains on foreign exchange, sugar futures and Brent crude option contracts totalling RM3mil.

Based on MSM’s results briefing, CGS-CIMB Research said a key factor for the weaker results was the group’s under-utilised Johor refinery.

MSM shared that one of its two boilers in the Johor refinery was undergoing repair works and it only expects this process to be completed in November, with the boiler potentially being recommissioned in December

“This effectively means the Johor refinery could only achieve a maximum utilisation factor (UF) of about 30% for FY22.

“The 1Q22 UF was 12% lower quarter-on-quarter due to the shutdown,” explained CGS-CIMB Research.

The group also incurred higher refining costs per tonne, up by 28% year-on-year (y-o-y) in forecast 1Q22.

This was largely due to higher gas costs which soared 80% y-o-y.

Its 1Q22 sales volume was also affected by the Johor refinery shutdown.

At MSM’s results briefing, CGS-CIMB Research also gathered that the group’s refining costs would remain high in 2Q22.

The research house reiterated a reduced recommendation on MSM with a lower TP on weaker earnings prospects.

“We lower our FY22-FY24 core earnings per share (EPS) forecast and project MSM to be loss-making in FY22 due mainly to higher raw sugar and refining costs, coupled with continued losses at its Johor operations,” it added.

Meanwhile, MIDF Research remained optimistic about MSM’s outlook, despite the group’s earnings for 1Q22 coming in below consensus expectations.

The research house said it was maintaining MSM’s FY22-FY23 revenue and earnings estimates “as we reckon the volume will eventually catch up, driven by normalised demand”.

This was in line with the reopening of activities across the hotel, restaurant and cafe channels and MSM’s strong brand equity with a market share of over 60%, said MIDF Research in its latest report.

It has maintained a “buy” call on the stock with a TP of RM1.38 by pegging its FY22 EPS of 18.5 sen to an unchanged target price earnings ratio of 7.5 times, which is within the range of seven times to 13 times for the consumer segment.