Stock Name: MSM
Company Name: MSM MALAYSIA HOLDINGS BERHAD
MSM Malaysia Holdings Bhd
(Sept 7, RM5.36)
Initiating coverage with neutral rating at RM5.40 and fair value of RM5.16: Sugar consumption in Malaysia has been increasing steadily over the past 20 years, growing at a compound annual growth rate of 4.1%. As sugar demand is fairly inelastic in nature and competition within the country is limited, we expect demand for MSM's products to remain stable even if economic conditions weaken. Any drop in commodity prices arising from a bleak economic backdrop will serve to lower the company's costs.
Half of MSM's sugar needs are secured by a three-year long-term contract. The current contract allows the company to purchase raw sugar at 17.5 US cents (52.2 sen) per lb, significantly below the current market price of'' 28 cents per lb. The contract not only enables MSM to fix in advance a substantial portion of its costs, but has historically allowed it to procure raw sugar at below market prices.
The current long-term contract expires at the end of this year. We think the new contract price is set to be higher than the present 17.5 cents per lb in view of current raw sugar prices. With additional sugar subsidies unlikely, how much the the government will raise the price ceiling for sugar in FY12 remains to be seen. Hence, there are uncertainties on both MSM's revenue and cost fronts.
MSM has been experiencing solid revenue and earnings growth over the past three years bolstered by strong volume growth, higher selling prices and cheap raw sugar supply. However, we expect revenue and earnings growth to slow down in 2011/12 on: (i) weaker growth in selling price and volume; and (ii) a higher raw sugar contract price from 2012 onwards.
We are valuing MSM at RM5.16 based on 13 times FY11 price-earnings ratio. While it is in a defensive business, the company appears to be fairly valued currently. Thus we initiate coverage on MSM with a 'neutral' rating. The stock offers a decent dividend yield of 5.2% for FY11 based on a 70% dividend payout ratio. ' OSK Research, Sept 7
This article appeared in The Edge Financial Daily, September 8, 2011.
Company Name: MSM MALAYSIA HOLDINGS BERHAD
| Research House: OSK | Price Call: HOLD | Target Price: 5.16 |
MSM Malaysia Holdings Bhd
(Sept 7, RM5.36)
Initiating coverage with neutral rating at RM5.40 and fair value of RM5.16: Sugar consumption in Malaysia has been increasing steadily over the past 20 years, growing at a compound annual growth rate of 4.1%. As sugar demand is fairly inelastic in nature and competition within the country is limited, we expect demand for MSM's products to remain stable even if economic conditions weaken. Any drop in commodity prices arising from a bleak economic backdrop will serve to lower the company's costs.
Half of MSM's sugar needs are secured by a three-year long-term contract. The current contract allows the company to purchase raw sugar at 17.5 US cents (52.2 sen) per lb, significantly below the current market price of'' 28 cents per lb. The contract not only enables MSM to fix in advance a substantial portion of its costs, but has historically allowed it to procure raw sugar at below market prices.
The current long-term contract expires at the end of this year. We think the new contract price is set to be higher than the present 17.5 cents per lb in view of current raw sugar prices. With additional sugar subsidies unlikely, how much the the government will raise the price ceiling for sugar in FY12 remains to be seen. Hence, there are uncertainties on both MSM's revenue and cost fronts.
MSM has been experiencing solid revenue and earnings growth over the past three years bolstered by strong volume growth, higher selling prices and cheap raw sugar supply. However, we expect revenue and earnings growth to slow down in 2011/12 on: (i) weaker growth in selling price and volume; and (ii) a higher raw sugar contract price from 2012 onwards.
We are valuing MSM at RM5.16 based on 13 times FY11 price-earnings ratio. While it is in a defensive business, the company appears to be fairly valued currently. Thus we initiate coverage on MSM with a 'neutral' rating. The stock offers a decent dividend yield of 5.2% for FY11 based on a 70% dividend payout ratio. ' OSK Research, Sept 7
This article appeared in The Edge Financial Daily, September 8, 2011.
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