MSM Malaysia Holdings Berhad $MSM / 5202 (MSM MALAYSIA HOLDINGS BERHAD)
Not Much of a Sweet Tooth

I) Company Overview
MSM Malaysia Holdings Berhad (MSM) is Malaysia’s leading refined sugar producer. It was listed on the Main Market of Bursa Malaysia Securities Berhad on 28 June 2011 and is one of the top 50 prominent companies on Bursa Malaysia with a market capitalization of RM 1.19 billion as at 25 March 2021. It is 51% owned by FGV Holdings and their next biggest shareholders are Koperasi Permodalan Felda Berhad at 15.28% and Amanah Trustees Berhad at 7.59%.

MSM’s core function is to run the sugar business of FGV Holdings Berhad by producing and selling refined white, brown and icing sugar products. The company conducts its business principally through two operating subsidiaries, MSM Prai Berhad in Penang and MSM Sugar Refinery (Johor) Sdn. Bhd. MSM also operates a logistics company - MSM Logistics Sdn. Bhd. The company had, in early June, sold off MSM Perlis Sdn Bhd to FGV Holdings Bhd, via subsidiary FGV Integrated Farming Holdings Sdn Bhd to RM175 million.

As of 2019, MSM controlled around 60% of the domestic market share and ranked as the No.8 largest sugar refiner in the world by capacity. Its largest (and only) competitor in the Malaysian market is Central Sugar Refinery (CSR), which has two refineries in Shah Alam with 600 tonnes capacity and Padang Terap, Kedah with 200 tonnes capacity.

II) Businesses
MSM Prai
MSM Prai Berhad operates the Prai sugar refinery in Penang. Located on the northwest coast of Peninsular Malaysia, the facility is the largest sugar refinery in Malaysia, with an annual production capacity of 960,000 tonnes of refined sugar, accounting for up to 84% of MSM’s total production capacity.

MSM Johor
MSM Sugar Refinery (Johor) Sdn. Bhd. (MSM Johor) operates MSM’s new sugar refinery based in Tanjung Langsat, Johor, which is set to be the largest standalone sugar refinery in Malaysia. The complex on the 50.63 acre land plot commenced its operations in November 2018 and was fully commercialised in April 2019, contributing up to 1 million tonnes on the Group’s annual production capacity. Contingent on increase in demand, expansion of Phase 2 shall commence by 2025. This would allow the facility to have a capacity of ~2 million tonnes. An investment of approximately USD $259 million was made for the development of Phase 1. MSM Johor is located at Tanjung Langsat Port and is anticipated to reduce cost across the value chain due to the strategic port facilities which contribute towards cost-efficiency as well as reducing the requirement for intensive manpower through the usage of automated machines.

MSM Logistics
MSM Logistics Sdn. Bhd. was incorporated on 23 November 1990 and is a wholly-owned subsidiary of MSM Prai Berhad (Malayan Sugar Manufacturing Company Berhad). It is the logistics arm which delivers sugar to MSM Prai’s customers throughout Malaysia. In line with its expansion plan, the Company is complemented with a fleet of 47 truck fleet comprising of 31 cargo trailers (20 m/ton), 2 rigid (15 m/ton), 2 rigid (10 m/ton), 5 tankers (20 m/ton) and 7 tankers (30 m/ton).

III) Production
The company’s total production for FY2020 was 1,010,215 tonnes, which translates to about a 47% utilization rate. They are produced and packed in different packing weights that include 5g, 500g, 1kg, 2kg, 25kg, 50kg, 1000kg, and up to 19 metric tons bulk road tanker. MSM’s sugar products are certified halal and kosher by the respective governing bodies The quality products are supplied to major companies in the beverage and confectionery industries, hotels, restaurants, food outlets and household consumers.

IV) Process
The refining process of raw sugar basically involves the removal of impurities and colour from raw sugar and the further refinement of sugar crystals. As a result, this produces food-grade products such as white sugar, brown sugar, caster sugar and icing sugar which is marketed to the general consumers and industrial uses. Molasses (a viscous by-product of the sugar refining process) is typically marketed to producers of ethanol, animal feed and yeast, among other products.

In brief, this is the process:
Raw Sugar Delivery > Raw Sugar Storage > Carbonation > Affirmation > Filtration > Ion Exchange Resin > Polishing Filtration > Evaporation > Crystallization > Curing > Screening > Packing and Delivery (See Slide 1 of Attached PDF for more info)

Feel free to read more about it here: https://bit.ly/3fstwfj

V) Management / Ownership
FGV Holdings, the company’s majority shareholders, is a government-owned investment company with a focus on crude palm oil, sugar, and logistics. The company is one of the world’s largest producers of crude palm oil and accounts for 15% of the production in Malaysia. With Koperasi Permodalan Felda Berhad and Amanah Trustees Berhad being the next two biggest shareholders, MSM relies on the backing of many federal agencies to sustain the share price. (See Slide 2)

VI) Sugar Price
MSM’s profitability is significantly influenced by the price of raw sugar, as they need to import the commodity from world-leading producers such as India, Thailand and Brazil before refining and processing it. This is the main cost for the company, and they will be susceptible to the fluctuations of the price of the commodity. MSM suffers when the price of raw sugar increases as they are unable to pass on the cost to their customer since there is a price ceiling in Malaysia for sugar (RM2,850 / tonne) that is not subsidized by the government.

Sugar prices are impacted by global consumption of raw cane sugar and its refined product. This means that global inventories of sugar impact the daily price of the contract. Moreover, regional weather and growing conditions can drive price fluctuations in sugar. Government actions like regulating sugar content or changing product labeling, particular in large markets such as the U.S. can have an effect. Also, the use of raw sugar in the creation of biofuels has created an interesting link between ethanol, corn, and sugar, suggesting that sugar may one day be considered more of a biofuel commodity than a food commodity.

In 2020, raw sugar prices touched lows of $10 per pound (US Sugar #11 Futures), which contributed to the group turning a positive profit after several years of losses. The price has recently risen and the last traded price was $17.95 per pound. (See Slide 3)

VII) Revenue / Income
In 4Q2020 and 1Q2021, MSM managed to earn a net profit of RM56,243,000 and RM31,186,000 respectively, for net profit margins of 8.92% and 6.06%. This reversed an 8-quarter losing streak that dates back to 4Q2018. However, leading up to 2018, profitability had been shaky for the company, as margins decreased from 10+% in the earlier part of the decade (2011-2015) to 3% or lower in 2016-2017, with some quarterly losses in the mix too. While the development of the Johor plant should have contributed to the expenditures of the company in this time, it remains to be seen how efficient the new plant will be and whether or not it can boost MSM’s profitability moving forward. (See Slides 4/5)

VIII) Domestic vs Global Presence
Out of the RM2.18 billion in revenue in FY2020, the Malaysia segment constituted RM1,715,271,000 and the rest was mostly distributed across Asia. The domestic segment has proved to be more profitable for MSM than their exports, which primarily land in Vietnam and China. However, decreased demand from back home has been and continues to be a concern for the company. 1Q21 sales volumes for the domestic and industries segments fell 14% and 26% yoy respectively, suggesting that the re-imposition of the movement control order (MCO 2.0) and rising sugar prices have had a negative effect. MSM was able to grow its export sales volume by close to three folds but this was not sufficient to offset the weaker domestic demand, causing overall domestic sugar sales volume to decline 3% yoy. (See Slide 6)

IX) Future Outlook
Personally, I am slightly bearish on the prospects of MSM Holdings, as there may be limited upside to the prospects of the company moving forward. Even with the development of the Johor plant scheduled for 2025 and the increase in capacity up to 2 million tonnes per annum, there are still several factors that may push back this plan and also limit the profitability of this venture. First, there is the fluctuation in raw sugar price, MSM’s main cost of goods sold, which leaves MSM subject to volatility and unstable profitability. Next, the lack of demand in domestic markets is worrying as the company has only about a 50% utilization rate with about 1 million out of the 2 million production capacity being utilized in their Prai and Johor refineries. Additionally, any company that has a product which can be considered harmful to consumers’ health (e.g. sugar) has to be wary of changing consumer preferences on a macro scale, with substitute sweeteners or ‘healthier” options potentially overtaking this market. Lastly, to an investor, a low profit company should have great growth prospects to be attractive, but if I’m looking for a mature company - which MSM is - I would rather have it as a cash cow with consistent results.

Access MSM Holdings' Annual Report here: https://bit.ly/37eshfi