MSM Malaysia – The Case for a Strong 1Q21 Surprise (Part 1)
MSM recently reported its first quarterly profit in 2 years, triggering a rally in its share price by 300% until it started to consolidate over the past two weeks. Let’s have a closer look if MSM’s quarterly profit is a fluke or can 2021 prove to be a golden turnaround year for MSM. This Part 1 is a qualitative assessment without diving too deep into numbers (Part 2).
1. A quick glance at MSM’s business model
The market loves a simple and easily understood business, and MSM is one of them. The company imports raw sugar, refines them, and produces refined white sugar + other value-added sugar products. It has 3 major customer groups: (i) Domestic consumers; (ii) Industry (F&B manufacturers) and (iii) Export.
2. Higher Selling Price in 1Q21: MSM will be registering a higher selling price to Industry and Export segment
Industry segment: CGS-CIMB reports that price premium for industry segment players have increased by RM50 to RM150 per tonne in 2021.
Export segment: both CGS-CIMB and Affin Hwang report that MSM has locked in 65% of its targeted export sales volume in the first half of 2021 (1H21) at a favorable price premium of USD140-145 per tonne.
3. Lower Cost of Production in 1Q21: MSM closed its Perlis plant and consolidates refinery into Johor + lower gas price in 1Q21
In the last quarter, MSM managed to reduce refining cost from RM455/tonne to RM355/tonne. Gas price constitute 40% of MSM's refining cost. For 1Q21, Gas Malaysia has lowered the gas price by 35%, translating to direct lower production cost for MSM.
4. Lower Raw Material Cost: MSM has hedged 85% of its 1H21 raw sugar needs for Domestic market
MSM has hedged at USD0.12-0.13/lbs. From Jan till now, raw sugar prices have actually averaged at USD0.157/lbs (20% savings). This means, the management’s foresight is directly translating to lower raw material cost for the company.
5. A potential one-off gain coming: RM90m sale of non-core plantation land (RM0.13/share)
In 2019, MSM was about to sell its non-core plantation land to F&N for RM156m but it was aborted in April 2020 (because F&N couldn’t get approval from EPU). However, in 4Q2020, MSM has again found a buyer for the land, but the price has reduced significantly to RM89.6m (you can see this in the balance sheet item “Non-current assets held for sale”). MSM confirms that they have received the offer in the latest Q release
Summary of Facts for 1Q21:
Increased selling price for Industry and Export
Lower raw material cost from hedging positions for domestic
Lower refining cost from 35% reduction in gas price
Increased Selling Price - Low Raw Material Cost - Lower Refining Cost = Higher EBITDA
Barring any unforeseen circumstances, all 3 facts above points toward a strong 1Q21, which may surpass 4Q20 results and trigger a share price rally. In Part 2, I will share on the numbers deep dive and projections.