PETALING JAYA: MSM Malaysia Holdings Bhd
is expected to remain in the red in the first half of financial year 2023 (1H23) given lack of clarity on its proposal to float retail sugar prices and likely inability to raise the utilisation rate of its sugar refinery in Johor.
CGS-CIMB Research, in its latest report, is also slightly negative on the group’s fundraising plans that would likely be earnings per share (EPS) dilutive if it involves a share placement exercise.
During its 4Q22 results briefing, MSM said higher global raw sugar prices were one of the main reasons behind its RM179mil reported net loss in FY22.
The group expects raw sugar prices to be in the range of 18.5 US cents to 21.5 US cents per pound or about RM1.80 to RM2.10 per kg.
CGS-CIMB Research said: “The rising raw sugar costs are likely to further pressure MSM’s profit margins in FY23, more so for its domestic wholesale segment given the RM2.85 per kg ceiling price on retail refined sugar, in our view.”
According to MSM, it is currently selling about 20,000 to 24,000 tonnes of retail refined sugar per month.
“Should its discussions with the government on floating the ceiling price of retail sugar come into fruition, it could rise by 70 sen to RM1.20 per kg,” it said.
“This could raise our FY23-FY25 core net profit forecasts by RM128mil to RM262mil (RM18mil to RM21mil for every 10 sen per kg) assuming no change in costs,” added the research house.
However, CGS-CIMB Research said it has not factored this potential into its forecasts for now pending clearer direction from the government on retail sugar prices.
Meanwhile, the group is planning to raise funds via share placements or a rights issue to pare down its debt.
As at end-December 2022, MSM’s net gearing stood at 0.43 times.
CGS-CIMB Research said: “Assuming MSM places out 10% of its shares at a 10% discount to its March 14 closing price of74 sen, and the share placement is fully subscribed, it could raise up to RM52mil, with its share base rising 10% to 773.3 million.”
This would potentially dilute its FY24-FY25 core EPS by 2.6% to 5.9%, it added.
Given this, and the possibility of a potential overhang on its share price, CGS-CIMB Research said it is slightly negative on potential share placements.
While the turnaround in MSM’s refinery in Johor is a key development to look out for, CGS-CIMB Research expects potential delays in ramping up the refinery’s utilisation factor (UF).
“This is because it could take time to secure the export contracts needed to ramp up UF and sales. We also believe MSM Prai refinery’s profits should offset the weakness at MSM Johor, and hence forecast FY23 core net profit of RM3mil,” noted the research house.
Hence, given concerns on MSM’s weak earnings prospects, CGS-CIMB Research has reiterated a “reduce” rating on the stock with a target price of 58 sen.
The upside risks for the group include higher ceiling price for retail refined sugar in Malaysia, and lower sugar and/or natural gas costs.
