THE disruptions due to the Covid-19 pandemic will bring about a lower demand overall for refined sugar, which will in turn negatively impact the earnings of MSM Malaysia Holdings Bhd, said Affin Hwang Capital.
The research house has downgraded MSM to a hold call, maintaining a target price of 44 sen, with the expectation that MSM will remain loss-making in 2020 due to the softer demand for refined sugar amid the Covid-19 disruptions.
It projected a core loss of RM95.2 mil for MSM’s 2020 financial year, which is a narrowing from 2019’s core net loss of RM129 mil, due in part to contracts signed on high raw sugar prices which caused an earnings drag of about RM90 mil in 2019.
“That said, a return to profitability may not materialise this year as we foresee both sales volume and average selling price remaining under pressure in light of Covid-19 disruptions since the start of the year,” its analyst Chow Wei Nien said.
This is despite lower sugar production, which should be an indicator of higher sugar prices. Global sugar production is expected to decline by about 6 million metric tonnes to 174 million metric tonnes for 2019 to 2020, according to the United States Department of Agriculture, due to a production decline in India as the country sees a smaller harvesting area and a decline in average sugar yields.
“While consumption is projected to be on a rising trend based on data as at November 2019, expectations of a sugar deficit year of -0.5 million metric tonnes for 2019/20 may be due for revision, in light of the outbreak of Covid-19 which will likely stretch beyond 1H20,” said Chow.
Lower sugar production, while normally a boon to sugar prices, the overall weaker demand may well tilt an anticipated deficit year to one of surplus in 2020, with raw sugar prices reversing their end-2019 rally over the past month.
“While low raw sugar prices bode well for the group’s raw material procurement, we expect average selling prices, in particular for the industrial and export segments, to see renewed pressure given that their prices fluctuate according to international sugar price movement,” said Chow.
However, Chow remained positive on MSM’s expansion into value-added downstream products, noting that part of the group’s three-year plan is to diversify its product offerings to boost volume and increase utilisation of its Johor refinery.
“We understand that more enquiries are coming in for liquid sugar and premix, although larger volumes have yet to be secured. Further diversification into products such as cordials,
condensed milk and chocolate are also on the cards for 2020 to 2021,” noted Chow.
With the 24% run-up in share price in the month to date, Chow believed the stock is now hovering at a more justifiable valuation.
Given the limited upside, Chow downgraded MSM to a hold call, maintaining a target price of 44 sen, with the expectation that MSM will remain loss-making in 2020 due to the softer demand for refined sugar amidst the Covid-19 disruptions.
At 12.09pm, MSM’s shares were last traded at a static 41.5 sen, with 5.9 million shares traded. – April 9, 2020
