MSM TO GAIN FROM SUGAR SHORTAGE
Supply tightness, mainly driven by lower global output, will boost commodity price
THE global sugar market is facing the largest supply shortage in five years, allowing MSM Holdings Bhd to bolster exports.
MIDF Research said the anticipated sugar supply tightness this year, mainly driven by lower global sugar production, especially from India, had lifted the commodity’s global price.
This was evident from the increase in average raw Sugar No. 11 Futures (NY11) to above US$13 per pound in the beginning of this year compared with the range of between US$10 and US$12 per pound in the second half of last year.
MIDF Research said currently, the NY11 price was trading at about two-year highs.
The market expects prices to stay between US$14 and US$15 per pound until the end of the second quarter this year.
“We expect MSM’s profit margin to improve gradually through higher average selling price of its refined sugars as white sugar prices have risen more than raw sugar prices in the rally,” it said.
MIDF Research said MSM was negotiating a new wholesale business model that could fetch a higher price for its refined sugar, which is expected to generate a gain of RM25 million a year.
“We view the current market price of above US$13 per pound would discourage manufacturers to procure directly from abroad.
“This phenomenon could increase MSM’s bargaining power in the domestic market where it derives 90 per cent of its revenue through higher pricing and sales volume,” it said.
MIDF Research said the recovery in global raw sugar price amid a global deficit had given MSM a breather as the lower sugar stock levels at key markets and the current premium white sugar prices over raw sugar price were expected to bode well for the group.
“We believe the group would be able to capitalise on this opportunity to improve its earnings prospects.
“With no new permits issued to local manufacturers and increasing global raw sugar prices, this could raise the bargaining power of the group to negotiate for a better pricing in the home market.”
The firm said MSM’s economies of scale and operational capabilities would allow it to obtain refined sugar at lower costs locally than procuring from global raw sugar markets at current prices.
“We opined that the global raw sugar prices would remain stable at this juncture and highly dependent on the Indian inventory levels which were still in surplus from the previous two high production seasons and the relative prices of ethanol in Brazil,” it said.
MIDF Research upgraded its recommendation on MSM to “neutral” from “sell” previously, with a target price of 81 sen from 70 sen previously.