Not spared by the rising cost environment
? MSM’s 4Q21 core net profit was below expectations due to weaker-than-expected sales volumes and higher refining costs.
? We forecast MSM to continue to be burdened by the higher refining costs (higher gas costs) as well as higher raw sugar costs going into 1H22F.
? We downgrade from Add to Reduce due to concerns over rising costs and longer time needed to turn around its Johor sugar refinery.
Second consecutive quarterly loss led to a disappointing FY21
MSM Malaysia Holdings (MSM) posted a core net loss of RM2m in 4Q21 (second consecutive quarter of core net losses), which effectively dragged down its FY21 core net profit further to RM26m (vs. core net profit of RM6m in FY20). Its FY21 core net profit accounted for 48%/26% of our/consensus full-year forecasts, below expectations as a result of lower export and domestic volumes as well as higher refining costs.
What caused the difference between net profits and core net profits
MSM’s reported net loss from continuing operations of RM16m for 4Q21 was higher than its core net loss, due mainly to i) RM6m provisioning of inventory, affected by the flash floods during 18-19 Dec 2021, ii) RM19m provisioning for the net realisable value of its sugar inventory and onerous contracts (arising from higher-than-expected selling costs), partially offset by iii) a net reversal of impairment of assets of RM8m.
Double whammy of weaker sales volumes and higher refining costs
MSM’s 4Q21 core net loss of RM2m vs. a core net profit of RM48m in 4Q20 was due mainly to i) lower sales volumes as its domestic industrial segment was affected by slower-than-expected recovery post the movement restrictions in 3Q21 and ii) weaker export sales volumes as its MSM Johor refinery is still undergoing optimisation efforts. This effectively reduced the group’s utilisation factor for the quarter to 49% vs. 58% in 4Q20. The group’s export/industrial sales volumes were down by 29%/11% yoy in 4Q21.
This was aggravated by higher refining costs (+29% yoy) owing to rising freight costs and higher gas cost from the increased crude oil prices. We gathered during MSM’s results briefing that its refining costs would remain high in 1Q22F.
Downgrade amid rising costs and delayed turnaround plans
We lower our FY22-23F core EPS forecasts to reflect higher refining costs, as well as lower export volumes. We reduce our P/NTA multiple to 0.6x from 1.0x previously (in line with 1 s.d. below its 5-year mean), to reflect our concerns over rising raw material costs and refining costs, as well as the longer-than-expected period to optimise and turn around its Johor refinery. Our TP is reduced to RM0.93, in line with the lower P/NTA multiple, to reflect the concerns above. With the reduction of its TP, we downgrade MSM to Reduce, as we believe MSM will continue to face yoy margin compression in 1H22F amid higher raw sugar and freight costs as well as higher refining costs. Upside risks include new export contracts and collaborative partnerships.