MSM Malaysia - Squeeze in margins in 3QFY12 HOLD

- Maintain HOLD on MSM Malaysia Holdings Bhd, with a lower fair value of RM5.25/share. Our fair value implies an FY13F PE of 16x.  

- MSM has declared a gross DPS of 8 sen for 9MFY12. For the full year, we are forecasting a gross DPS of 19 sen, which is the same as FY11. 

- MSM’s 9MFY12 results were below expectations and consensus estimates. The group reported a 13.6% YoY decline in net profit in 9MFY12 due to an erosion in gross profit margin and lower demand from industrial companies. 

- Recall that sales volume shrank by 8% in 1HFY12 compared with 1HFY11 as industrial consumers bought more imported sugar. These large consumer companies account for an estimated 30% of domestic customers.

- Gross profit margin eased from 19% in 9MFY11 to 16.8% in 9MFY12 due to the higher cost of raw sugar locked-in under the long-term contract. 

- In the spot market, the average price of raw sugar was relatively flat at US$0.2256/pound in 9MFY12 against 9MFY11.    

- Going forward although the Malaysian government has reduced sugar subsidy by 20 sen/kg, this would be compensated by a 20 sen/kg increase in the selling price of refined sugar. 

- The hike in the selling price of refined sugar took effect from 29 September 2012.

- Compared to 2QFY12, MSM’s revenue in 3QFY12 improved. 

- MSM’s revenue expanded 11.9% from RM546.1mil in 2QFY12 to RM611mil in 3QFY12 supported by a recovery in sales volume of sugar. We believe that this was due to festive-driven demand. 

- Gross profit margin edged down from 16% in 2QFY12 to 14% in 3QFY12 due to a higher cost of raw sugar. Average price of raw sugar inched up marginally 1.7% QoQ to US$0.2151/pound in 3QFY12.

- Going forward, MSM should benefit from the decline in the prices of raw sugar.

- Since peaking at US$0.2398/pound on 20 July 2012, the price of raw sugar has fallen 20% to about US$0.1915/pound currently.  

Source: AmeSecurities