MSM Malaysia - GP margin inches up HOLD

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

- MSM has declared a final gross DPS of 11 sen for 4QFY12. This brings total gross DPS to 19 sen for FY12 (net payout: 66.1%), which is the same as FY11. For FY13F, we have forecast that gross DPS would remain at 19 sen, which translates into a yield of 3.8%.

- MSM’s FY12 results were in-line with our expectations but below consensus estimates. After margin erosions in 9MFY12, MSM’s gross profit margin improved marginally in 4QFY12. Gross profit margin inched up from 14.4% in 3QFY12 to 14.9% in 4QFY12.

- We believe that the QoQ enhancement in gross profit margin in 4QFY12 was driven by falling prices of raw sugar. According to Bloomberg, raw sugar price eased 7.9% to US$0.1968/pound in 4QFY12 from US$0.2137/pound in 3QFY12.

- On a yearly basis, raw sugar price slid 2.8% from US$0.2232/pound in FY11 to US$0.2170/pound in FY12.

- MSM had not enjoyed the benefit of lower raw sugar prices in early-FY12 as the group had used mainly raw sugar locked-in under the long-term contract to produce refined sugar.

- Recall that the price of raw sugar locked-in under the longterm contract was about US$0.26/pound, which was higher than spot prices of US$0.18/pound.

- MSM’s turnover was flat at RM2.3bil in FY12. Although sales volume slid in FY12, this was compensated by an increase in the selling price of sugar in 4QFY12. Under Budget 2013, selling price of refined sugar was increased by 20 sen/kg to RM2.50/kg to compensate for a reduction in subsidy. MSM received sugar subsidies of RM244.8mil in FY12 compared with RM142.7mil in FY11.

- MSM suffered a decline in the sales volume of refined sugar to the industrial players. About 30% of MSM’s domestic customers come from the industrial segment.

- These industrial companies switched to cheap imports of refined sugar instead of buying them from the local sugar refiners like MSM and Tradewinds Group. Overall sales volume of MSM’s refined sugar products declined 8% in 1HFY12 versus 1HFY11.

- Going forward, MSM would be focussing more on the export markets to mitigate soft domestic consumption of refined sugar. The export market segment is estimated to account for 17% of MSM’s volume of production in FY13F.

Source: AmeSecurities