MSM ... Oct12

It will remain resilient to the 20 sen per kg reduction in sugar subsidies as announced in Budget 2013. There has been a corresponding increase since in retail prices to rm2.50 per kg effective 29 Sept 2012. This will likely induce some pressure on domestic consumption but MSM should experience little impact on its earnings.

The magnitude of the decline in MSM’s total volume is not likely to be overly substantial. It is attributed to two factors. First only about 56% to 60% of the company’s volumes are subsidized. Thus the remaining will not be negatively impacted by the cut in subsidies to 34 sen per kg. Secondly, the demand for sugar is fairly inelastic. There are few alternatives for sugar and that rm2.50 is already quite cheap. Even though the higher selling price cover the subsidy cut, it may lead to slower demand growth as consumers and industries may induce the content of sugar in food and beverage products to offset the higher costs.

MSM’s share price is supported by its relatively defensive earnings, dividend yields and potential M&A. MSM has a dividend policy of at least 50% payput in earnings.

Meanwhile while raw sugar prices had fallen 16% year to date, MSM will likely not benefit from this as it has locked in 64% of its raw sugar needs for 2012 under the LTC for 2012 to 2014 which translates to 80% of its domestic volume. On top of that, only 6% to 10% of its total sales volume is exposed to variable cost as large industrial users are no longer entitled to subsidized sugar since Jan 2012. This effectively estimated MSM’s risk to varying raw sugar prices.

The unique condition about the 2012 – 2014 LTC however is that it allows MSM to reduce raw sugar sourced from the contract to just 48% of total volume starting in 2013. This exposes 8% to 12% of MSM’s total volume to a fixed price and varying cost situation again.