MSM prospects remain bleak as refining costs take their toll

PETALING JAYA: MSM Malaysia Holdings Bhd’s earnings prospects remain bleak as it continues to suffer from suboptimal utilisation rates and high refining costs, says CGSCIMB Research.

The sugar refiner reported a core net loss of Rm90mil in the third quarter of the financial year 2022 (3Q22), due to higher refining costs and underutilisation of its refinery in Johor.

This also marked the fifth consecutive quarter of core net losses and the highest quarterly core net loss recorded since it was listed in 2011, said CGS-CIMB Research in its 3Q22 results review on MSM.

The group also posted nine-month core net losses of Rm156mil against a net profit of Rm28mil over the same period iin 2021, noted CGS-CIMB Research.

“This is larger than our full-year estimate of Rm124mil and the Bloomberg consensus full-year expectation of a Rm89.6mil net loss,” the research house noted.

According to CGS-CIMB Research, MSM was hit by ballooning refining costs, particularly for natural gas, which is about 40% of its refining costs and rose 55% year-on-year (y-o-y) in 3Q22, as well as higher NY11 raw sugar costs and the weakening of the ringgit against the US dollar.

“Its 3Q22 core net loss widened 16.2 times y-o-y from 3Q21’s core net loss of Rm6mil and can be attributable to higher raw sugar and refining costs, mainly due to the hike in energy prices resulting from the ongoing Ukraine-russia war,” said the research house.

Furthermore, MSM’S loss-making Johor refinery continues to have suboptimal utilisation rates.

“In 3Q22, the group’s utilisation factor was 46%. Sequentially, this was not much of an improvement versus 47% in 2Q22,” the research house pointed out.

“To this end, CGS-CIMB Research expects losses to persist into 4Q22 but “likely to improve later.”

“While we estimate that refining costs were broadly flat quarter-on-quarter (q-o-q) in 3Q22 (2Q22 refining costs: RM475 per tonne), we reckon that the q-o-q jump in core net loss in 3Q22 to Rm90mil from Rm34mil in 2Q22 was likely due to increased raw input costs.

“It is likely that MSM will have booked in higher raw sugar and freight costs,” said CGS-CIMB Research.

According to the research firm, MSM’S core net losses could narrow in 4Q22.

This would be due to potentially higher export premiums and stronger wholesale demand ahead of end-of-year festivities, which could offset increased raw sugar and refining costs, it added.

CGS-CIMB Research, which has a “reduce” call on the stock, has retained its core earnings-per-share forecasts on MSM with a target price of 58 sen, pending its results briefing, which will be held later.