MSM’s growth to recover in financial year of 2018
KUCHING: MSM Malaysia Holdings Bhd (MSM) is expected to see slower growth for the financial year 2017 (FY17) due to the high cost of sugar.
However, analysts believe that the group could only swing back into profitability in FY18 as the prices of raw sugar are expected to decline.
In a report, the research arm of AmInvestment Bank Bhd (AmInvestment) said, “We believe that MSM would return to the black in the first quarter of FY18 (1QFY18) on the back of a fall in the cost of raw sugar.”
It noted that raw sugar accounts for almost 80 per cent of MSM’s production cost.
However for FY17F, it forecast a net loss of RM34.7 million compared with a net profit of RM12.8 million previously.
“Due to the high cost of raw sugar inventory, we reckon that the group would only swing back into profitability in 4QFY17 instead of 3QFY17,” it opined.
It also expected MSM’s net gearing to rise from 9.9 per cent as at end-FY16 to 32.4 per cent as at end-FY17F.
“The group’s gross borrowings are anticipated to increase from RM535.2 million to RM1.26 billion due to financing for the construction of the US$ 259 million sugar refinery in Johor,” it added.
On the outlook of the prices of raw sugar, AmInvestment believed that prices would likely stay depressed.
It explained, “We believe that raw sugar prices would be low in the immediate term as global supply is expected to increase.
“Due to the abolishment of the sugar quota in the European Union ( EU) in early October 2017, EU producers are free to produce and export raw sugar at any amount.
“The USDA said that the EU’s sugar exports are expected to rise to 2.2 million tonnes this season from 1.5 million tonnes in the previous season. Sugar production in the EU is forecast to increase by 3.6 million tonnes to 20.1 million tonnes this year.
“Industry experts also predicted that global sugar surplus would be between 2.5 million and 4.5 million tonnes this year.
“Some experts opined that the oversupply would last until year 2020F. The EU accounts for roughly 10 per cent of global sugar production.”
With that, the research team pointed out that the cost of MSM’s raw sugar in 1HFY18 could be 20 per cent to 30 per cent lower than 1HFY17.
“MSM has locked in raw sugar supply for the domestic market for 1HFY18 at undisclosed prices. In our view, the price of lockedin raw sugar may be about US$0.16 per pound to US$0.18 per pound, which is a few US cents higher than the average spot price of US$0.14635 per pound in 3Q2017.
“Incomparison, MSM’srealised average cost of raw sugar was estimated at US$0.241 per pound in 1HFY17,” it shared.
AmInvestment added, “MSM only locks in the US dollar when the vessels are coming in to deliver raw sugar. Hence, the group only locks in the US dollar three months ahead. As raw sugar is imported in US dollar, MSM is a beneficiary of a stronger ringgit.
“So far this year, the ringgit has appreciated against the US dollar.”
Overall, the research team believed that MSM’s sale volumes expected to grow by single-digit percentage in FY18F.
“We forecast MSM’s sales volume (ex-molasses) to decline by 3.1 per cent in FY17F before improving by 5.7 per cent in FY18F. The recovery in FY18F is expected to be driven by export sales from the new sugar refinery in Tanjung Langsat, Johor.”
As for the domestic demand for sugar, it expected the consumption of refined sugar in Malaysia to be 1.4 million tonnes this year compared with 1.328 million tonnes back in 2009.