MSM’s 3QFY12 and 9MFY12 earnings of RM48.4m (-2.1% y-o-y) and RM163.6m (-13.4% y-o-y) again fell short of estimates. The 14.5% y-o-y increase in effective domestic selling prices targeted at compensating for the higher raw material costs was unable to lift profit as softening domestic and export sales kept revenue and earnings subdued. We are lowering our FY12 and FY13 forecasts by7.7% and 7.2% respectively, with a revised RM4.50 FV, based on a 13.0x FY13 PER. The stock’s dividend yield is 3.3%-3.4%.
Weaker than expected. MSM’s 3QFY12 revenue and core earnings stood at RM611.0m (-2.1% y-o-y, +11.9% q-o-q) and RM48.4m (-2.1% y-o-y, -0.4% q-o-q) respectively. Revenue softened despite a 14.5% y-o-y increase in effective domestic selling prices (wholesale prices + subsidy). While waning domestic and export sales were to blame, the 48.6% surge in the cost of raw material sourced from its three-year raw sugar supply contract (LTC) further soured profits. The group’s 9MFY12 revenue during the nine-month period were the same as those for 3Q, with higher selling prices mitigating the impact of softer sales volume, but higher input costs compressed earnings. Consequently, its EBIT margin narrowed by 2.6ppt to 12.8%. MSM’s Jan–Sept 2012 net profit accounted for 64.7% and 63.5% of our and consensus estimates. In comparison, the 9MFY11 earnings represented 71.4% of MSM’s full-year bottomline.
On the hunt for cheaper sugar. Although sugar is a relatively affordable staple, domestic demand for MSM’s sugar has been particularly weak this year. While we MSM’s better-quality sugar, we think that condensed milk manufacturers may have opted for cheaper sugar. Sugar, which makes up a large portion of condensed milk makers’ raw material costs (~45% of condensed milk is sugar), can be sourced from neighbouring Thailand at a cheaper price, albeit with some compromise on quality.
Weaker than expected. MSM’s 3QFY12 revenue and core earnings stood at RM611.0m (-2.1% y-o-y, +11.9% q-o-q) and RM48.4m (-2.1% y-o-y, -0.4% q-o-q) respectively. Revenue softened despite a 14.5% y-o-y increase in effective domestic selling prices (wholesale prices + subsidy). While waning domestic and export sales were to blame, the 48.6% surge in the cost of raw material sourced from its three-year raw sugar supply contract (LTC) further soured profits. The group’s 9MFY12 revenue during the nine-month period were the same as those for 3Q, with higher selling prices mitigating the impact of softer sales volume, but higher input costs compressed earnings. Consequently, its EBIT margin narrowed by 2.6ppt to 12.8%. MSM’s Jan–Sept 2012 net profit accounted for 64.7% and 63.5% of our and consensus estimates. In comparison, the 9MFY11 earnings represented 71.4% of MSM’s full-year bottomline.
On the hunt for cheaper sugar. Although sugar is a relatively affordable staple, domestic demand for MSM’s sugar has been particularly weak this year. While we MSM’s better-quality sugar, we think that condensed milk manufacturers may have opted for cheaper sugar. Sugar, which makes up a large portion of condensed milk makers’ raw material costs (~45% of condensed milk is sugar), can be sourced from neighbouring Thailand at a cheaper price, albeit with some compromise on quality.
Maintain NEUTRAL. We are cutting our FY12 and FY13 earnings forecasts by 7.7% and 7.2% respectively as we trim our domestic volume expectations and increase our LTC cost assumption to USD0.26 per lb from USD0.255 per lb previously. Accordingly, this lowers our FV for MSM to RM4.50, based on a 13.0x FY13 PER. The stock’s FY12 and FY13 dividend yields are unexciting at 3.3% and 3.4% respectively.
Source: OSK
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