MSM Malaysia - Effect of margin squeeze priced in Hold

- We maintain a HOLD on MSM Malaysia Holdings Bhd with an unchanged fair value of RM5.40/share. Our fair value is based on a PE of 14x on FY12F EPS. 

- However rolling forward our valuation basis to FY13F, our fair value would imply a PE of 13.2x.  

- MSM’s 1QFY12 results were within consensus estimates and our expectations. The group has not announced 4QFY11’s final dividend yet. We believe that this would be done during the AGM, which should take place anytime soon.

- The group’s revenue rose 5.7% YoY to RM531.8mil while gross profit fell 23.2% YoY to RM105.5mil in 1QFY12.

- The YoY improvement in revenue in 1QFY12 was due to a hike in the selling price of sugar from RM2.10/kg to RM2.30/kg in May 2011. 

- Hence, the effect of the increase in the selling price was reflected in 1QFY12’s results but not 1QFY11’s financials. 

- The Malaysian Government had also raised the sugar subsidy from 20 sen/kg to 54 sen/kg effective January 2012 to help mitigate the rising cost of raw sugar.

- In spite of this, MSM’s gross profit margin shrank from 27.3% in 1QFY11 to 19.8% in 1QFY12. 

- We believe that MSM’s gross profit margin was abnormally high in 1QFY11 and that the level of gross profit margin of 19% to 20% is the normalised margin for the group. 

- 1QFY12’s gross profit margin of 19.8% is in line with our expectations of 19.5% for the full year.   

- According to Bloomberg, the average price of raw sugar in the free market was US$0.2345/pound in 1QFY12. This was 6.2% higher than the average price of US$0.2209/pound in 1QFY11. However since then, price of raw sugar has dropped and it is currently hovering at US$0.2105/pound. 

- We believe that domestic demand was weak in 1QFY12. Due to festive reasons, we reckon that domestic demand is usually the most robust in 3Q of the financial year.

- Out of all of MSM’s domestic customers, we estimate that about 30% of the sales are to unsubsidised customers such as multinationals and large food and beverage companies.

- We have forecast that sales volume of MSM’s refined sugar products would expand 4% in FY12F.    

Source: AmeSecurities