MSM benefits from cheaper raw sugar in spot market
Sugar producer MSM Malaysia Holdings Bhd, which is controlled by the Felda group, is benefiting from the current downtrend in free-market raw sugar price, which has given a boost to its earnings.
The company’s long-term obligation to purchase raw sugar from its suppliers is gradually being reduced to 40% in FY13 from 60% in FY12.
Thus, the company is able to source for cheaper raw sugar from the spot market.
At the same time, the government is likely to address the subsidy rationalisation plan in the upcoming budget to trim the country’s fiscal deficit which was reportedly rising.
Higher sugar prices could be back on the agenda this time around as the government had reduced the subsidy for sugar by 20 sen per kg in the last budget.
The price of sugar, a controlled item, had gone up five times in recent years – by 20 sen per kg on Jan 1, 2010; 25 sen on July 18, 2010; 20 sen on Dec 4, 2010; 20 sen on May 10, 2011, and 20 sen on Sept 29, 2012, bringing the retail price to RM2.50 per kg currently.
Responding to the move by the government to reduce sugar subsidy, MSM Malaysia said it had passed the higher cost to customers by increasing its retail sugar price proportionately.
Therefore, MSM Malaysia is expected to benefit from lower raw sugar prices and the potential subsidy rationalisation plan by the government.
MIDF Research analyst Kelly Tan says: “While MSM is contractually required to purchase 60% of its FY12 raw sugar requirements for retail sale through various long-term contracts, the group’s obligation was reduced to 40% beginning FY13 to be carried through into FY14, in accordance with the terms of the long-term contracts.
“This could make a big impact as retail sales make up the bulk of MSM’s sales volumes and revenue,” she tells FocusM.
She adds that the International Sugar Organisation has forecast that global supplies of sugar will outstrip demand.
She says the international body has projected an excess of 3.5 million metric tonnes (MT) in 2013/2014, adding that the situation is likely to persist until next year.
Meanwhile, RHB Research analyst Chan Jit Hoong says: “The recent frost in Brazil has driven up raw sugar prices in the past month amid worries of a reduction in sugarcane yields.
“However, the loss quantum turned out to be minimal, which sent sugar prices down again. In addition, the weak Brazilian reais against the US dollar encourages Brazilian sugar producers to increase their exports and this may further soften sugar prices.”
After the company’s briefing on Aug 23, Tan notes that MSM Malaysia has put in some strategies to address the concern over its operational costs.
She says the company is tapping into the low raw sugar price as such a situation will not last forever.
“While total approved capital expenditure budgeted for FY13 was around RM76.2 mil, only RM28.1 mil has been utilised in H1FY13.
“Therefore, the company has room to further use up to RM48.1 mil in 2HFY13. Major areas of application will include capacity increments, machinery additions, upgrades and replacements.
“We view the expansions favourably as economies of scale will be the likely result, thus bolstering MSM Malaysia’s competitiveness,” Tan notes.
According to Bloomberg data, raw sugar prices have fallen from a high of 35 US cents per pound in January 2011 to a low of 16 US cents in July 2013 on high inventories.
Tan says: “The cost savings [from this low price] are expected to have a huge impact given that free-market sugar traded at 34% discount to MSM Malaysia’s long-term contract cost in H1FY13.”
She adds that these cost savings are expected to translate into higher revenue as MSM Malaysia is able to increase the price competitiveness of its products.
Besides that, she notes MSM Malaysia has inked several long-term contracts with a few suppliers, diversifying its risk of price fluctuation associated with the cost of raw materials.
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