09 May 2012
MSM Malaysia Holdings quarter core net profit declined 24.8% on higher raw material prices, 2012 - 2014 long-term supply contract price set at 20 US cents, 49% higher than 17.5 US cents per pound previously, Government's sugar subsidy raised from 20 sen to 54 sen per kg not enough to offset the impact - Affin Research
(MSM opening stock price yesterday (9.5.2012) was RM 5.31)
MSM Malaysia Holdings Bhd reported a year-on-year revenue growth of 5.7% to RM531.8mil for the first quarter ended March 31 on stronger export volumes and higher average selling prices.
However, earnings before interest and tax (EBIT) margin fell sharply by 7.2 percentage points to 16.2% compared with 23.4% in the same period a year ago. This was primarily attributed to the higher price of raw sugar negotiated under the new long-term contract.
According to the Minister of Domestic Trade, Consumerism and Cooperatives, the new 2012-2014 long-term contract price has been set at 26 US cents per pound, 49% higher than the previous 2009-2011 price of 17.5 US cents per pound. While the Government has raised sugar subsidy from 20 sen per kg to 54 sen, it was not enough to fully offset the incremental increase in cost.
Although no official announcement has been made, we understand that MSM is already taking delivery of raw sugar under the new long-term contract price. Recall that about 80% of MSM’s domestic raw sugar requirements are supplied by long-term contracts.
Therefore, the sharp margin compression has caused MSM’s first-quarter core net profit to decline sharply by 24.8% year-on-year to RM66.6mil. However, these results were within our expectations and accounts for 25% of both our and consensus estimates.
There was no declaration of dividend for the quarter.
On a sequential basis, core net profit for the first quarter fell 12.2% on the back of a 12.8% decline in revenue. The latter was partially due to a high base effect. We believe that the fourth quarter of 2011 was a seasonally stronger quarter as volume sales picked up in tandem with Hari Raya Haji and also in preparation for Chinese New Year celebrations.
EBIT margin for the first quarter of financial year 2012 was weaker at 16.2% versus 17.8% in the fourth quarter 2011, which was due to higher raw sugar price under the new long-term contract. It is to be noted that we have incorporated the new long-term contract price of 26 US cents per pound as well as the 54 sen per kg subsidy into our forecasts.
We are keeping our FY12-FY14 net profit forecasts unchanged. After rolling forward our valuation horizon to calendar year 2013 (CY13), we have raised our target price to RM5.30 from RM5.15 previously. This is pegged to an unchanged price-earnings target of 13 times on CY13 earnings per share.
We continue to like MSM for its attractive dividend yields of 3.7% to 4%, which is premised on a 50% dividend payout ratio, and resilient demand, given that sugar is a household staple.
The company’s key risk include a spike in global raw sugar prices and the removal of sugar subsidies without a corresponding increase in the ceiling price, in which case MSM would have to absorb the higher costs.