INVESTMENT HIGHLIGHTS

• 1QFY17 recorded a net loss of RM34.6m

• Revenue grew by +17.3%yoy driven by domestic segment

• Sales for industries segment increased but volume dropped

• Cost of sales however outpaced revenue growth

• Maintain SELL with a revised TP of RM3.46 based on a EPS18 and PER18 of 20.37sen and 17.0x respectively

Lagged our and concensus expectations. MSM’s 1QFY17 recorded a net loss of RM34.6m from the RM24.1m earnings reported in the previous quarter.

Revenue grew by +17.3%yoy driven by domestic segment. MSM’s 1QFY17 revenue grew by +17.3% to RM649.0m premised on improved sales and higher volume of refined sugar sold for domestic market segment of RM315m (+30%yoy) and 115k MT (+19%yoy) respectively. The company sold more to domestic consumers at 48% of total sales compared to 41% in 1QFY16.

Sales for industries segment increased but volume dropped. The industries segment recorded a higher sales of RM244m (+26%yoy) in 1QFY17. However, sales volume dropped to 92k MT (-5%yoy) as some industrial consumers shifted their sourcing of refined sugar from wholesaler offering better pricing due to the celiling price imposed. Export segment meanwhile experienced a lower sales and volume of RM68m (-9%yoy) and 32k MT (-26%yoy) respectively.

Cost of sales however outpaced revenue growth. The cost of sales for 1QFY17 rose by +43.7%yoy to RM645.9m mainly due to the higher raw sugar price and weakening Ringgit compared to the corresponding quarter. Due to these, GP margin has shrunk significantly by -18.3ppts yoy to 0.5%. Nevertheless, selling and distribution cost and administrative expense grew in line with revenue of +8.2%yoy and 10.1%yoy respectively.

Prospects. 2017 will remain as a challenging year for MSM as the higher raw sugar price will continue to hurt its profit margin despite the recent refined sugar ceiling price revision. Nevertheless, the company is still negotiating with the government on other forms of assistance e.g. grants or subsidies. Meanwhile, MSM is undertaking cost cutting measures such as increasing assets utilisation to manage it margin.

Impact to earnings. We revise our FY17 and FY18 earnings downwards by -32% and -20% guided by the severe contraction in margin due to the higher raw material cost.

Maintain SELL with a revised TP of RM3.46. We maintain our SELL recommendation and revise our target price upward to RM3.46 (previously RM3.22 per share) as we roll forward our valuation base year to FY18. Our target price is based on PER18 and EPS18 of 17.0x and 20.37sen respectively. Our target PER is premised on the average PER of the company for the past one-year.

Source: MIDF Research - 1 Jun 2017