Initiating Coverage 24 October 2011 Maybank IB Research PP16832/01/2012 (029059) Sugar is what keeps the body going Steady eddy. MSM Malaysia Holdings (“MSM”) is Malaysia’s leading sugar refinery and distributor. We believe it is well positioned to exploit Malaysia’s insatiable demand for sugar due to its scale, superior product quality and cost efficiency. We initiate with a HOLD, with a target price of RM4.85/share based on DDM. Stable growth, low risk, and cash cow. Sugar consumption is directly correlated to population growth and diet, and it has grown by 4.1% CAGR for the past 20 years. MSM is a staunch disciple of the cost plus approach business model, which is low risk in nature. It has achieved efficiency gains and reduced unit costs, evident in its widening profit margin. Virtually debt free, and generates significant free cash flow, we think this is a stellar inflation beating, defensive stock. Three-pronged growth strategy. (1) Organic growth – boost volumes on higher utilisation rate, efficiency enhancements and facility expansion; (2) grow the export business by focusing on product quality complimented with competitive bidding; and (3) strategic acquisition of a third party. Furthermore, MSM is extracting structural fixed cost reductions from the synergies of business consolidation. The FELDA connection. FELDA is the de facto master of Malaysian agriculture, with a full fledge infrastructure and logistics chain across the world. Its political clout is substantial, and this may be beneficial for MSM’s trade negotiations and raw sugar procurement. Upcoming raw sugar contract expiry to impact sentiment. Domestic raw sugar is purchased on a 3-year long term contract. The current price of 17.5 US cents/lb expires at the end of the year; MSM is certain to pay higher prices as the current sugar prices are hovering around 27.0 US cents/lb. The ability for MSM to raise its selling price is a concern as domestic sugar is a price controlled item. DDM, peer comparison suggests RM4.75-4.83/share. Based on DDM, MSM is worth RM4.83/share, and RM4.75/share based on 10x 2012 PER – which is the average long-term PER for sugar refineries. MSM is highly cash generative, with an expected cashflow yield of 12.3%, 10.6% and 9.6% in 2011-13F respectively, and it can fund its capex requirements in 2012-13 entirely from its retained earnings. MSM: Summary earnings table FYE Dec (RM m) 2009A 2010A 2011E 2012E 2013E Revenue 1,643.6 2,168.6 2,138.3 2,159.1 2,202.3 EBITDA 305.6 387.1 458.3 504.8 545.4 Reported Net Profit 237.3 232.9 283.2 324.9 354.7 Recurring Net Profit 228.5 253.4 303.7 334.1 354.7 Recurring Basic EPS (Sen) 32.5 36.0 43.2 47.5 50.5 DPS - net (Sen) 27.3 26.8 17.2 19.8 21.6 PER 15.4 13.8 11.6 10.5 9.9 EV/EBITDA (x) 11.4 9.4 8.1 7.1 6.5 Dividend Yield - net (%) 5.5 5.4 3.5 4.0 4.3 Net Gearing (%) cash 9.2 12.9 5.7 2.0 ROE (%) 45.2% 24.7% 19.0% 19.7% 19.7% Consensus (RM m) n.a. n.a. 273.1 293.8 320.5 Source: Maybank-IB MSM Malaysia Holdings Hold (new) Share price: RM5.00 Target price: RM4.85 (new) Wong Chew Hann, CA [email protected](603) 2297 8692 Chai Li Shin [email protected](603) 2297 8684 Description : Leading sugar refiner and distributor in Malaysia. Information: Ticker: MSM MK Shares Issued (m): 703.0 Market Cap (RM m): 3,514.9 3-mth Avg Daily Volume (m): 1.65 KLCI: 1,438.83 Major Shareholders: % Felda Group 54.0 Koperasi Permodalan Felda 20.0 EPF 6.3 Price Performance: 52-week High/Low RM6.1/RM3.5 1-mth 3-mth 6-mth 1-yr YTD 0.6 - - - - Price Chart (RM5) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Jun-11 Jul-11 Aug-11 Aug-11 Sep-11 Oct-11 MSM MK Equity
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Initiating Coverage 24 October 2011
Maybank IB Research PP16832/01/2012 (029059)
Sugar is what keeps the body going
Steady eddy. MSM Malaysia Holdings (“MSM”) is Malaysia’s leading
sugar refinery and distributor. We believe it is well positioned to exploit
Malaysia’s insatiable demand for sugar due to its scale, superior
product quality and cost efficiency. We initiate with a HOLD, with a
target price of RM4.85/share based on DDM.
Stable growth, low risk, and cash cow. Sugar consumption is directly
correlated to population growth and diet, and it has grown by 4.1%
CAGR for the past 20 years. MSM is a staunch disciple of the cost plus
approach business model, which is low risk in nature. It has achieved
efficiency gains and reduced unit costs, evident in its widening profit
margin. Virtually debt free, and generates significant free cash flow, we
think this is a stellar inflation beating, defensive stock.
Net cash flow (64.1) 176.8 104.5 60.6 Net Debt/Equity (X) 0.1 0.1 0.1 0.0
Capex to Debt (%) (11.6%) (13.7%) (20.8%) (32.3%)
N.Cash/(Debt)PS (sen) 18.5 28.9 14.0 5.4
Opg CFPS (sen) 19.1 50.4 52.3 56.0
Free CFPS (sen) 15.5 41.3 38.5 34.5
Sources: Company, Maybank-IB
MSM Malaysia Holdings Berhad
Page 19 of 21
Appendix I: Sugar refining process chart
Source: Company
MSM Malaysia Holdings Berhad
Page 20 of 21
Source: Company
MSM Malaysia Holdings Berhad
Page 21 of 21
Definition of Ratings
Maybank Investment Bank Research uses the following rating system:
BUY Total return is expected to be above 10% in the next 12 months
HOLD Total return is expected to be between -5% to 10% in the next 12 months
SELL Total return is expected to be below -5% in the next 12 months
Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings
BV = Book Value FV = Fair Value PEG = PE Ratio To Growth
CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio
Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter
CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset
DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share
NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds
EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital
EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year
EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date
EV = Enterprise Value PBT = Profit Before Tax
Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.
The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Bhd and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Bhd and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Bhd, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice.
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