Challenging outlook for MSM on overcapacity

PETALING JAYA: The outlook for MSM Malaysia Holdings Bhd is expected to remain challenging, as the lower demand for refined sugar in an overcapacity industry will take a longer time for the group to turn around its business from a loss position.

CGS-CIMB in a report yesterday said it was slashing MSM’S 2020 to 2022 core net profit estimates from 49% to 239% to reflect lower refining margins for the company.

“The concerns of weaker sales volumes and margins more than offset the positives from its plans to rationalise its Perlis refinery to reduce costs and capacity. We downgrade our target price from 88 sen to 58 sen, based on a lower price per net tangible asset of 0.4 times to reflect our concern over its pricing power in the domestic market.

“The lower demand for refined sugar in an overcapacity industry suggests that it will take a longer time for the group to turn around its business from a loss position. Upside risks are the sale of a strategic stake and higher refining margins. Potential de-rating catalysts include larger losses for its Johor refinery.”

The research house added that domestic sugar sales volumes have been impacted by the movement control order (MCO).

“We expect the group’s second-quarter 2020 earnings to remain weak, as we gather that the group’s sales volumes to industries have been impacted by the lower consumption during the MCO, coming in at 10% to 25% below the company’s budget in April and May.

“We expect this, coupled with the excess sugar refining capacity in Malaysia, to affect MSM’S pricing power in the second quarter.”

MSM reported that its net loss widened to Rm34.71mil in the first quarter of financial year 2020.

A year earlier, the group had recorded a net loss of Rm7.06mil.

The higher loss was attributable to MSM’S lower gross margin of 3%, higher finance cost and higher depreciation incurred in the quarter compared with the same quarter last year, due to the commercialisation of its Johor plant.

However, MSM’S revenue in the first quarter rose by 5% year-on-year to Rm510.84mil, thanks to the increase in the overall average selling price for the group and new export product in 2020.

The group’s loss per share in the first quarter was 4.94 sen, as compared to a loss per share of 1.01 sen a year earlier.

Affin Hwang Capital said the focus will be on improving MSM’S Johor’s utilisation rate.

“All in, we deem the result to be broadly within our full-year core net loss expectation of Rm95.2mil but below consensus’ loss of Rm54mil.

“Going forward, we note that the group intends to raise production in MSM Johor towards a breakeven utilisation rate of 48%, in part through the launch of healthy sugar variants in June 2020 and the penetration of new export markets (aside from existing Chinese clients) for its liquid and premix sugar,” it said.

“Going forward, we note that the group intends to raise production in MSM Johor towards a breakeven utilisation rate of 48%.” Affin Hwang Capital