Tuesday 8 May 2012

MSM Malaysia (MSM MK, NEUTRAL, FV RM4.96, Last close: RM5.18)


MSM registered 1QFY12 earnings of RM66.6m (-24.8% y-o-y), in line with both our and consensus estimates. The newly signed LTC contract price led to significant raw sugar cost increases, thus dampening earnings on a y-o-y basis. Historical 1Q earnings have, however, represented more than 30% of full-year earnings given the higher utilization of LTC sugar during the quarter. Quarterly earnings should be more evenly distributed in 2012 given the proximity between the new LTC and market prices. Maintain NEUTRAL with FV of RM4.96.

Within estimates. MSM posted revenue of RM531.8m for the first three months of 2012 (+5.7% y-o-y due to higher selling prices and stronger export volumes,  -12.8% q-o-q, following a 4Q that was boosted by Christmas and Chinese New  Year holidays). Headline profit figures looked impressive at first glance with a 7.0% y-o-y growth. However, stripping out currency and commodity futures losses incurred in 1QFY11 sees core earnings declining by 24.8%, after cost of sales rose 16.5%. 1QFY12 EBIT margins correspondingly narrowed by 7.2ppts to 16.2%. The quarter’s RM66.6m core earnings represent 24.8% and 25.1% of our and consensus forecasts respectively.

Higher LTC cost eats into margins. MSM has historically utilized its long-term contract (LTC) raw sugar supply in 1Q and 4Q each year (sourced at USD0.175 per lb in 2009-2011).  Thus,  1Q and 4Q usually generate seasonally stronger results, since the USD0.175 per lb LTC cost was significantly lower than  the  average 2011 market raw sugar prices of USD0.25 per lb (1QFY11 itself amounted to 33.4% of 2011’s full-year earnings). On the contrary, 2Q and 3Q have a higher blend of raw sugar sourced at market rate. The company had on average sourced half of its annual raw sugar needs from LTC and the remainder at market prices. Following the expiration  of the previous LTC last year, the new LTC cost currently stands at a widely speculated USD0.26 per lb, representing a 48.6% rise. Our expectations for seasonal effects to be smoothened out in 2012 seems to be panning out well, as the LTC price is less likely to deviate extensively from market prices.

Maintain NEUTRAL. We keep our FY12 and FY13 forecasts unchanged at RM268.2m and RM282.8m respectively. 2QFY12 should reflect a more comparable y-o-y figure with higher utilization of raw sugar priced at market rates. Maintain NEUTRAL with an unchanged FV of RM4.96, based on 13.0x FY12 PER. Decreasing raw sugar market prices may be the cause for the steadily increasing share price, although we note that the new LTC now accounts for 80% of MSM’s raw sugar needs, thus removing a large bulk of the company’s cost sensitivity to spot prices.

Source: OSK188

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