CGS-CIMB upgrades MSM to 'hold', says worst may be over but risks remain

TheEdge Tue, Nov 17, 2020 12:41pm - 2 months ago

KUALA LUMPUR (Nov 17): CGS-CIMB Research has upgraded MSM Malaysia Holdings Bhd to "hold" from "reduce" previously, as the research house feels that the worst could be over for the group from an earnings perspective.

However, the research house said the sugar producer lacks rerating catalysts due to uncertain leadership following the recent removal of former chief executive officer Datuk Khairil Anuar Aziz and loss-making Johor refinery.

The group announced yesterday that its net loss for the third quarter ended Sept 30, 2020 (3QFY20) narrowed to RM71.21 million on improved sales margins and new export products, while revenue rose to RM594.55 million from RM531.69 million a year ago.

"9MFY20 (cumulative nine months ended Sept 30, 2020) core net losses of RM43 million were lower than our and consensus forecasts of RM64 million net loss for the full [financial] year due to better refining margin," said CGS-CIMB analysts Ivy Ng Lee Fang and Nagulan Ravi in a note today.

The analysts said they expect MSM to post lower losses for 4QFY20 on the back of higher sales volumes and lower operating costs following the closure of the Perlis refinery and write-off of biological assets.

"The group reiterated its strategy to turn around by consolidating production in MSM Johor, lowering production costs and raising ASP (average selling price) by removing first layer wholesalers from the supply chain.

"Our key concerns are the recent rise in raw sugar prices to US$0.14/lbs from the low for 2020 of US$0.09/lbs which could negatively impact MSM's profit margin for local refined sugar in 2021F as well as [the] current leadership vacuum. MSM has hedged 50% of its 1H21 raw sugar requirements at US$0.12-0.13/lbs," said the analysts.

Furthermore, they added: "We lower our FY20 core losses to reflect higher refining margin but raise FY21F losses to reflect higher tax expenses. We maintain our TP (target price) of 55 sen, still based on a lower P/NTA of 0.4x [to reflect our concerns over the low utilisation rate of its Johor refinery]."

At the time of writing, shares in MSM had fallen one sen or 1.85% to 53 sen, valuing the group at RM369.06 million.

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