Budget 2019’s sugar tax to have negative impact on industry demand
KUALA LUMPUR: The Federal Budget 2019's proposed sugar tax on drinks has been projected by analysts to have negative impact on industry demand for sugar.
According to Finance Minister Lim Guan Eng's speech last week, the government has decided to add ‘sugar sweetened beverages' to the list of manufactured goods subject to excise duty.
“The duty proposed will be at RM0.40 per litre to be implemented on April 1, 2019 for non-alcoholic beverages containing added sugars of more than five grams (g) per 100 millilitre (ml) drink and for fruit or vegetable juice containing added sugars of more than 12g per 100ml drink,” he said.
In AmInvestment Bank Bhd's (AmInvestment Bank) view, this will negatively impact industry demand for sugar in Malaysia.
“Presently, the industry demand for sugar in Malaysia is about 1.5 million tonnes per year compared with 1.37 million tonnes in 2008. With the sugar tax on drinks, we think that industry demand for sugar would decline,” the research firm said.
AmInvestment Bank went on to note that this is negative for MSM Malaysia Holdings Bhd (MSM) as it would affect the demand for the group's refined sugar products.
Although the tax is on the added sugar content, the research firm believed that consumer companies reduce the overall sugar content in their beverages anyway.
It also noted that MSM's customers include companies like Fraser & Neave Holdings Bhd and Nestle (Malaysia) Bhd (Nestle).
“With a drop in domestic demand, the prospects for MSM's new sugar refinery in Tanjung Langsat, Johor are uncertain.
“There is likelihood that MSM may not be able to find enough customers for the sugar refinery, which commands a production capacity of one million tonnes per year.”
Currently, AmInvestment Bank forecasted a six per cent decline in sales volume for MSM in financial year 2018 (FY18E) and a 3.6 per cent increase in sales volume in FY19F.
Power Root Bhd (Power Root) will also be affected by the proposed sugar tax, given that this squeeze the group's canned drinks' margins.
“This is also negative for Power Root as it would compress its canned drinks' margins. Canned drinks made up some 15 per cent of total revenue in FY18.
“We estimate total gross profit margins to decline by circa one percentage point. We cut our earnings forecast by eight per cent for FY20F and FY21F.”
In contrast, assuming tax is imposed on added sugar, AmInvestment Bank opined that Nestle will be minimally impacted as most of its canned beverages contain less than 5g of refined sugar while around 1g to 2g is natural sugar content from its other ingredients such as milk.