MSM Malaysia goes into the red, ends FY18 below expectations
KUALA LUMPUR: MSM Malaysia Holdings Bhd’s (MSM) earnings for the fourth quarter of financial year 2018 (4QFY18) has dipped into the red, ending the sugar producers core earnings for FY18 at RM35.1 million, below expectations as it only met 60 per cent of consensus full-year earnings forecast.
In a result review report, the research arm of MIDF Aman ah Investment Bank Bhd (MIDF Research) explained that this negative deviation was mainly due to quarterly loss incurred in 4QFY18 of RM-10.4 million which the group experienced due to losses in its Johor operations and higher finance cost.
Year over year (y-o-y), the group’s FY18 sales volume had declined by -5.0 per cent y-o-y to 947,848 metric tonnes and was predominantly due to a fall in the sales of the domestic and export segment of -7.4 and -21.4 per cent y-o-y, respectively.
Also grappling with lower average selling prices in FY18, total sales revenue had decreased by -17.2 per cent y-o-y to RM2.145 billion.
The poor domestic sales in FY18 was mostly attributed to unfavourable government policies and cheaper smuggled Thai sugar, while the fall in export sales due to the oversupply of sugar globally.
“Under the Pakatan Harapan (PH) Government, food and beverages (F&B) manufacturers in Malaysia can apply for sugar import permits. Recently, a Sarawakian manufacturer received first approved permit (AP) to import sugar directly from other countries and a few other applications are being assessed by the Government.
“This AP would act as a battering ram to new avenue in purchasing refined sugar directly from markets that potentially offer cheaper rate and MSM might probably lose out market share,” explained the research note.
Moreover, the sugar industry is expected to face more unfavourable macro policies as the PH government has also introduced during Budget 2019, an excise duty of 40 sen per litre placed on sweetened beverages.
The sugary drink tax is set to be implemented from April 1, 2019.
“This would potentially lessen the demand for sugar domestically,” commented the research arm.
Additionally, the average selling price of sugar is also expected to lower in FY19 as the government has set the ceiling price for granulated sugar and refined granulated sugar to be reduce by 10 sen per kg to RM2.85 from RM2.95, effective September 1.
“We opine that all these government interventions might be a drag to MSM’s sales revenue and volume,” said the research arm.
On a brighter note, MSM’s FY18 gross profit and net profit margins have both improved greatly by +213 and +220 per cent y-o-y to 8.49 and 1.63 per cent respectively.
“This was premised on the cost of sales contracted at a faster pace at +21.1 per cent y-o-y than the drop-in revenue of - 16.0 per cent y-o-y.
“Thiswasduetothedeterioration of the price of raw sugar amid oversupply conditions, coupled with stronger ringgit against USD making the cost of production considerably low.”
Looking ahead, the research arm isn’t too optimistic on MSM’s performance in FY19 and has cut their core earnings estimate for the group by 50 per cent to RM50.5 million as fears of heightening domestic competition and more government intervention continue amidst a downtrend of the demand growth for sugar.
“We view that MSM would be facing some headwinds especially from the domestic market as policies emerge are not in the favour of the company where domestic segment accounted for 52 per cent of the company’s sales revenue.
“The new sugar refinery in Johor Bahru might provide MSM economies of scale and ramp up production, however, the current demand condition is not that promising.”
“On the flip side, production seem to begin tapering in sugarproducing countries such as Brazil, EU and Thailand which will probably give rise to a deficit in 2H19.
“While this might provide an export opportunity for MSM to expand its businesses, the downside would be the increase in cost of sales and lower ceiling price in the local market,” it added.