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CGS-CIMB downgrades MSM Malaysia to 'reduce', expects refinery suspension to pose earnings risk

KUALA LUMPUR (April 9): CGS-CIMB Research has downgraded MSM Malaysia Holdings Bhd (MSM) to "reduce" at RM1.76 with an unchanged target price (TP) of RM1.22 and said MSM Malaysia's temporary suspension of it's Johor refinery from April to May 2021 poses an earnings risk to the group.

Its analyst Ivy Ng said the shutdown would allow for the rectification of the plant’s boiler after a breakdown and, upon completion, enable the plant to achieve its targeted utilisation factor by 3Q21.

She said she was negative on this development as we expect the temporary shutdown to negatively impact MSM’s 2Q earnings due to higher losses from its Johor refinery.

"This is because the suspension of the Johor refinery will lead to two months’ loss of revenue, while the borrowing costs, depreciation and other fixed costs associated with it will continue to be expensed.

"Secondly, the shutdown comes ahead of the Hari Raya festive season and the economy reopening, when domestic sugar demand is likely to be stronger than usual," she said.

Ng highlighted that the group will also be missing out on the strong export potential.

"As such, we are negative as MSM will not be able to fully capture the strong festive demand or may have difficulty fulfilling the required demand from its customers that were locked in earlier," she said.

Ng said should the unexpected plant shutdown lead to short-term shortages of refined sugar in the Malaysia market, it may lead the government to consider issuing approved permits (APs) for refined sugar, which will lead to stiffer competition in the domestic sugar market.

"Lastly, we are slightly concerned about MSM’s heavy reliance on its older Prai refinery to carry the burden of fulfilling its refined sugar demand," she said.

At 11am, MSM fell 4.55% or 8 sen to RM1.68, valuing it at RM1.18 billion.


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