This article first appeared in The Edge Financial Daily on May 17, 2017 - May 23, 2017
MSM Malaysia Holdings Bhd
(May 16, RM4.45)
Maintain hold with an unchanged target price (TP) of RM4.26: The Star published an article dated May 15, 2017 entitled “Sugar producer wants to increase price by 40 sen per kilo”, highlighting that MSM Malaysia Holdings Bhd is still in talks with the government to increase local sugar price by 40 sen per kg.
We believe it is unlikely that the government would increase the ceiling price by 40 sen per kg as ceiling prices had already been adjusted in March. Recall that MSM had previously appealed to the government to raise ceiling prices to pass on raw sugar costs by this quantum (average financial year 2016 [FY16] raw sugar cost was at about 20 US cents per pound [lb] versus 15.3 US cents per lb in FY15). The government responded by increasing the prices for wholesale and retail sugar by 7% and 4% to RM2.87 per kg (+19 sen) and RM2.95 per kg (+11 sen) effective March 1, 2017, which is less than what MSM expected.
Moreover, the raw sugar price had recently declined from 20 US cents (86 sen) per lb since March 2017 to current levels of 16 US cents per lb.
While we think it is unlikely to see a 40 sen per kg increase, we do not discount the possibility of an increase of a smaller quantum. Our back-of-the envelope calculation shows that for every one sen increase in domestic average selling prices (ASP), net profit increases by 1.5% to 1.6% for FY17E (estimate) to FY19E.
Hence, if the government were to increase sugar price by the remaining quantum, which is 29 sen (40 sen minus 11 sen), and keeping everything else constant, our earnings will jump 44% by plugging in a 29 sen per kg increase in the domestic segment (53% of FY16 revenue and 48% of volumes). To note, currently we assume MSM’s domestic price to be a blended RM2.84 per kg.
We make no changes to earnings as we await 1QFY17 results later this month. Maintain “hold” with unchanged 12-month TP of RM4.26 based on an unchanged price-earnings ratio (PER) of 12.5 times (three-year mean PER) as we believe earnings will recover from a low base.
Downside/upside risks are: i) unfavourable raw sugar prices; ii) sharp increase in sugar ceiling price; and iii) stronger-than-expected sugar demand. — Affin Hwang Capital, May 16