Analysts assured of MSM’s turnaround in FY18, but competition risks linger

KOTA KINABALU: Affin Hwang Investment Bank Bhd (AffinHwang Capital) remains assured of MSM Malaysia Holdings Bhd’s (MSM) earnings turnaround in financial year 2018 (FY18) but note that competition risks linger for the group.

Following a recent meeting with management, the research firm remain assured of MSM’s earnings turnaround in FY18 on the back of easing cost pressures arising from lower raw sugar prices and a relatively stronger ringgit.

“After posting a net loss of RM32.6 million in FY17, the positive earnings momentum seen since the third quarter of 2017 (3Q17) is expected to continue into FY18 as cost pressures are expected to subside,” the research firm said.

However, despite positive earnings momentum in the past few quarters, MSM’s top-line performance has been lacklustre with quarterly declines since 2Q17.

“This was attributed to stiff competition from approved permits( AP) imports and smuggled sugar, which caused domestic sales volumes to disappoint,” it said.

“As the new Tanjung Langsat refinery is coming on stream in the second half of 2018 (2H18), management is looking to utilise surplus capacity to cater to export markets.”

The research firm thus remained cautious on the export market due to intense competition and lower margins compared to the domestic market.

While AP imports have been rampant in the past few quarters, Affin Hwang’s checks with management reveal that such imports are expected to subside.

“We understand that no new AP licenses have been issued. However, we are of the view this will continue to affect sales volumes at least for the next few quarters, as we believe that it will take some time before the smuggled inventory is cleared.

“Nonetheless, we are positive on the new government’s commitment to reduce sugar smuggling and abolish refined sugar AP import permits.”

As Affin Hwang foresees competition from AP imports and smuggled sugar to still persist in the near term, the research firm revised downwards its earnings forecasts to reflect lower volume and average selling price (ASP) assumptions for 2018, while marginally adjusting its 2019-2020 forecasts.

“As the new Tanjung Langsat refinery comes on stream in 2H18, there also might be a potential earnings drag coming from additional operating, depreciation and interest expenses.

“Nonetheless, we are still forecasting that MSM will turn profitable in FY18 on the back of lower raw sugar prices and a relatively stronger ringgit.”