MSM Malaysia - Fall in sales volume to industrial customers Hold

- Maintain HOLD on MSM Malaysia Holdings Bhd, with an unchanged fair value of RM5.40/share. Our fair value implies an FY13F PE of 14.5x.  

- MSM’s 1HFY12 results were below expectations and consensus estimates due to a squeeze in operating margins and lower demand for its products. 

- We have reduced MSM’s FY12F earnings forecast by 8.7% to account for a 2% sales volume growth versus 4% previously. 

- We have also assumed that the cost of raw sugar sourced under market prices would average 26 US cents/pound in FY12F against 25.2 US cents/pound originally.

- MSM’s revenue inched up marginally to RM1.08bil YoY in 1HFY12 underpinned by higher selling prices. Recall that the Malaysian government increased the selling price of refined sugar from RM2.10/kg to RM2.30/kg in May 2011. 

- Excluding the hike in selling prices, we reckon that sales volume of refined sugar to industrial or unsubsidised customers declined 5% to 10% YoY in 1HFY12. We estimate that unsubsidised customers account for 30% of MSM’s domestic sales of refined sugar. 

- We expect sales volume to pick up in 3QFY12 due to festive-driven demand. MSM achieved its highest level of revenue in 3QFY11. The group’s revenue in 3QFY11 accounted for 27% of full-year’s turnover.

- Gross profit margin shrank from 21.6% in 1HFY11 to 18.1% in 1HFY12. On a QoQ basis, gross profit margin fell from 20% in 1QFY12 to 16% in 2QFY12.  

- The erosion in gross profit margin was due to a 1.8% YoY rise in the price of raw sugar in 1HFY12. According to Bloomberg, the average price of raw sugar was 22.38 US cents/pound in 1HFY12 versus 21.99 US cents/pound in 1HFY11. 

- On a QoQ basis, we reckon that the erosion in MSM’s operating margin was due to lower selling prices for the export markets. In addition, the group could have locked in higher cost of raw sugar in 1QFY12 for delivery in 2QFY12.

- Hence, MSM could not capitalise on the cost of raw sugar, which declined 9.8% from an average of 23.45 US cents/pound in 1QFY12 to 21.15 US cents/pound in 2QFY12.

Source: AmeSecurities