MSM Malaysia Holdings Bhd (Nov 14, RM4.85)
Maintain hold with target price of RM4.85: MSM is expected to release its 3QFY11 results in the fourth week of November.
3QFY11 is a seasonally strong quarter due to the Hari Raya Aidil Fitri season and school holidays. Furthermore, MSM will reap the benefit of stronger ringgit against the US dollar which will help to reduce its raw sugar input cost.
Maintain “hold”, with an unchanged target price of RM4.85 per share based on dividend discount model (DDM).
We expect sugar volumes to decline by 5% to 6% year-on-year (y-o-y) due to the cessation of local export businesses.
This is consistent with the management’s input in 2QFY11, average selling price (ASP) should be up by 4% y-o-y from the price increase implemented in early 2011.
Unit cost is expected to decline as MSM reaps the benefit of the stronger ringgit against the greenback making its raw sugar cheaper while maintaining a constant ASP.
This should support a strong 3QFY11 financial performance (2QFY11 net profit: RM88.7 million, 1HFY11: RM139.6 million).
MSM is expected to announce its maiden dividend in this quarter, and all investors are keen to find out the payout ratio.
We have used the minimum guaranteed payout ratio of 50% in our earnings forecasts, but we believe the company can comfortably afford 60% to 65% as it is highly cash generative with minimal capital expenditure requirements.
The current domestic raw sugar contract is due to expire at the end of the year and we eagerly await the management’s inputs regarding the upcoming contract.
MSM is certain to pay higher prices, as the current sugar prices are hovering around 25 US cents (78 sen) per lb versus the old contractual rate of US 17.5 cents per lb. The ability for MSM to raise its selling price is the issue as domestic sugar is a price controlled item.
We maintain our recommendation pending the resolution of the next long-term contract for raw sugar and news of the payout ratio.
As our valuation is DDM-based, any material increase of payout ratio from our assumed 50% will impact positively on our target price.
There is scope for the management to surprise on the upside and therefore we advocate a “hold” call for now. — Maybank IB Research, Nov 14
This article appeared in The Edge Financial Daily, November 15, 2011.
Maintain hold with target price of RM4.85: MSM is expected to release its 3QFY11 results in the fourth week of November.
3QFY11 is a seasonally strong quarter due to the Hari Raya Aidil Fitri season and school holidays. Furthermore, MSM will reap the benefit of stronger ringgit against the US dollar which will help to reduce its raw sugar input cost.
Maintain “hold”, with an unchanged target price of RM4.85 per share based on dividend discount model (DDM).
We expect sugar volumes to decline by 5% to 6% year-on-year (y-o-y) due to the cessation of local export businesses.
This is consistent with the management’s input in 2QFY11, average selling price (ASP) should be up by 4% y-o-y from the price increase implemented in early 2011.
Unit cost is expected to decline as MSM reaps the benefit of the stronger ringgit against the greenback making its raw sugar cheaper while maintaining a constant ASP.
This should support a strong 3QFY11 financial performance (2QFY11 net profit: RM88.7 million, 1HFY11: RM139.6 million).
MSM is expected to announce its maiden dividend in this quarter, and all investors are keen to find out the payout ratio.
We have used the minimum guaranteed payout ratio of 50% in our earnings forecasts, but we believe the company can comfortably afford 60% to 65% as it is highly cash generative with minimal capital expenditure requirements.
The current domestic raw sugar contract is due to expire at the end of the year and we eagerly await the management’s inputs regarding the upcoming contract.
MSM is certain to pay higher prices, as the current sugar prices are hovering around 25 US cents (78 sen) per lb versus the old contractual rate of US 17.5 cents per lb. The ability for MSM to raise its selling price is the issue as domestic sugar is a price controlled item.
We maintain our recommendation pending the resolution of the next long-term contract for raw sugar and news of the payout ratio.
As our valuation is DDM-based, any material increase of payout ratio from our assumed 50% will impact positively on our target price.
There is scope for the management to surprise on the upside and therefore we advocate a “hold” call for now. — Maybank IB Research, Nov 14
This article appeared in The Edge Financial Daily, November 15, 2011.
