MSM Malaysia - Margins to improve in 2HFY12 Hold

- Our recommendation on MSM Malaysia Holdings Bhd remains a HOLD. Our fair value of RM5.40/share for MSM implies an FY13F PE of 14.5x.

- MSM held an analyst briefing yesterday. We understand that the group’s weak 2QFY12 results were due to a fall in sales volume and higher cost of raw sugar. 

- Total sales volume fell 6.8% from 461,792 tonnes in 1HFY11 to 430,597 tonnes in 1HFY12. The decline in sales volume was largely due to an 8% decline in demand from the domestic customers. 

- We understand that the fall in demand from the unsubsidised customers was mainly due to a manufacturer of condensed milk products, which bought most of its refined sugar supply from overseas. 

- However, most of the other unsubsidised customers continued to source their supply of refined sugar from MSM due to its better quality.

- We also gather that domestic demand shrank in 1HFY12 due to competition from Thailand. Consumers in Kelantan bought cheaper refined sugar from Thailand.  

- Going forward, we understand that sales volume has picked up in July in line with the festive period in August. 

- In spite of the QoQ fall in the price of raw sugar in 2QFY12, MSM’s operating margin eased as the group used mainly raw sugar sourced under the long-term contract to produce refined sugar. 

- Presently, the cost of raw sugar of 26 US cents/pound locked-in under the long-term contract is higher than spot prices.   

- We understand that MSM’s operating margin should improve in 2HFY12 as the group capitalises on the current decline in cost of raw sugar. 

- Price of raw sugar is currently 20-21 US cents/pound. About 57% of MSM’s raw sugar is sourced under the longterm contract while the balance 43% is sourced under prevailing market prices.     

Source: AmeSecurities