MSM Malaysia Holdings Berhad

Transcription

1 Important note and notice disclaimer: This report is strictly for LOCAL distribution only. KDN: PP 10744/06/ June 2011 IPO Listing Notes MSM Malaysia Holdings Berhad Sweet Rebirth Not Rated Target Price (TP): RM4.20 (Retail IPO Price: RM3.38) BACKGROUND A sugar refiner reborn: Malayan Sugar Manufacturing Holdings (MSM Holdings) is a leading sugar refining producer in Malaysia with 57% market share. The company wholly own two subsidiaries: SHARE INFORMATION Issuer MSM Holdings Malayan Sugar Manufacturing Company Berhad (MSM) and Kilang Gula Felda Perlis Sdn Bhd (KFGP). Before October 2009, MSM was 100% owned while KFGP was 50% owned by the listed PPB Group. It was bought over by the unlisted Felda group. The MSM Holdings IPO is effectively a relisting of the sugar refineries. The business: MSM Holdings operates two sugar refineries in Prai, Penang (MSM Facility) and Chuping, Perlis (KGFP Facility), a small plantation and a mill. It has over 1.1 million m/t annual production capacity of refined sugar at 85% utilisation rate. MSM Holdings is primarily involved in the production, marketing and sale of the refined sugar products. Leader in sugar industry. In 2010, MSM Holdings produced about 945,000 m/t of refined sugar products and ultimately has the lion s share of the local sugar market in Malaysia at 57% (whereby 8% is under KGFP and 49% under MSM). The remaining market share of 43% is controlled by Tradewinds (refer chart 1). Products offerings. There are eight types of refined sugar products manufactured by MSM Holdings (refer table 1). The sugar products are sold under the brand names Gula Prai and Gula Perlis. Around 88.9% of MSM Holdings revenue is contributed by the domestic market, while the remainder 11.1% is exported to other countries. Listing IPO Offer Price (Retail) Offer For Sale Public Issue Institutional offering Retail Offering Total Issued Shares (@TP: RM4.20) Market Cap (@TP: RM4.20) TENTATIVE LISTING DATES Investors Education Roadshow ( PDIE ) Prospectus Launch Institutional and retail offering commences Commencement of management roadshow Main Board of Bursa Malaysia RM m of existing shares 125m of new shares 206.4m shares 28.1m shares m RM2.38bn From 19 May June 2011 Retail offering ends 13 June 2011 Institutional offering ends 15 June 2011 (TBC) Allotment of shares 24 June 2011 Listing of MSM Holdings 28 June 2011 KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

2 CHART 1: MARKET SHARE IN SUGAR INDUSTRY T R A D E W I N D S 4 3 % K G F P 8 % M S M 4 9 % Source: Prospectus TABLE 1: LISTS OF SUGAR PRODUCTS OFFERED Products Fine granulated white sugar Coarse granulated white sugar Coarse brown sugar Soft brown sugar Icing Sugar Caster Sugar Super fine white sugar Molasses Source: Prospectus Primary Use Retail, commercial food industry, food and beverage manufacturing Retail, commercial food industry, food and beverage manufacturing Retail Retail, commercial food industry Retail, commercial food industry for cakes and pastries Retail, commercial food industry for baking Food and beverage manufacturing Ethanol, animal feed, yeast production CHART 2: SUGAR PRODUCTS Source: Google Image 2

3 LISTING EXERCISE IPO Details. MSM Holdings is offering an IPO of up to 234.6m ordinary shares of RM0.50 each comprising offer for sale of up to 109.6m existing shares and public issue of 125m new shares with an enlarged share capital of m shares. The IPO will be divided into two offerings: Institutional offering of up to 206.4m shares and Retail offering of 28.1m shares. Based on retail IPO price of RM3.38/share, MSM Holdings market capitalisation will be RM2.38bn upon listing and trading at 10.2x of PER10. MSM Holdings will raise around RM422.5m from the public issue this month whereby 75% of the proceeds will be spend on capital expenditure in upgrading the latest machinery and refining method as well as for production capacity expansion for both of its subsidiaries. Another 22.2% will be used for working capital which is slated to be used within 1 year time frame and the remaining balance of 2.1% will be used for listing expenses (refer table 2). TABLE 2: UTILIZATION OF IPO PROCEEDS Details CAPEX for investment in latest machinery and refining methods and production capacity expansion Estimated period RM (million) (%) Within 2 years Working capital Within 1 year Listing expenses (est.) Within 6 months TOTAL Source: MSM Holdings Post listing corporate structure: Post listing IPO will see Felda being the largest shareholders with 51% or 54% equity depends on the exercise of greenshoe options. Koperasi Permodalan Felda Malaysia Bhd will hold 20% of the equity stake and remaining of 26% or 29% via greenshoe options will be owned by public shareholders (refer chart 3). Chart 3: CORPORATE STRUCTURE Pre-Listing Restructuring FELDA Post Listing FELDA 100% 100% 100% FGVH FGVS KPF 36% 49% 15% FGVH MSM HOLDINGS 100% 100% KGFP MSM FGVS 40% 100% KPF 20% PUBLIC SHAREHOLDERS 26% / 26%* 100% ASTAKONAS FGVH = Felda Global Ventures Holdings Sdn Bhd FGVS = Felda Global Ventures Sugar Sdn Bhd KPF = Koperasi Permodalan Felda Malaysia Bhd 100% MSM PROPERTIES MSM *Post-greenshoe MSM HOLDINGS 100% 100% KGFP 3

4 Corporate Structure Pre-Listing Restructuring Post Listing Pre-greenshoe Post-greenshoe FGVH 36% 14% 11% FGVS 49% 40% 40% KPF 15% 20% 20% Public - 4% 4% MITI Investors % 11.5% Institutional Investors % 13.5% Source: Prospectus EARNINGS HISTORY AND ESTIMATE For the past three years, MSM Holdings revenue grew 88% to RM2,168.6m in FY10 from RM1,154.2m in FY08. Net profit was up 91% to RM232.9m in FY10 from RM122.2m in FY08. EBITDA and net profit margins average sustained for three consecutive years at around 18% and 12% each respectively. As at end FY12/10, MSM Holdings total assets stood at RM1,788m. TABLE 3: EARNINGS FYE Dec Revenue (RM million) Net Profit (RM million) EBITDA margin (%) Net Profit margin (%) 2009 (actual) 1, (actual) 2, (MIDFR est.) 2012 (MIDFR est.) Source: MIDFR, Prospectus 2, , We expect a 15% improvement in FY11f earnings vis-à-vis the previous year on the back of higher sales volumes and increased of sales prices of refined sugar for both domestic and export market. An improved outlook is expected ahead for sugar industry as sugar consumption is forecasted to continue its upward trend in Malaysia by registering CAGR of 4.19% (2011f to 2016f), reflecting population and income growth. CHART 4: PROJECTED SUGAR CONSUMPTION (MALAYSIA) 2011E 2016F Estimated Sugar Consumption ('000 tonnes) C A G R % E F F F F F Source: Independent Market Research report by Frost & Sullivan 4

5 PROSPECTS Expand export sales. MSM Holdings intends to increase its export sales of refined sugar for the purpose of 1) reducing heavy dependency on local market by expanding internationally; 2) earning foreign exchange to partly hedge the foreign currency obligations for raw material purchases; 3) maximising utilisation of production capacity and 4) decreasing average unit production cost. We expect MSM Holdings to export 15% of its production volume by FY15f. Expand production capacity and efficiency. To cater for the rising demand, MSM Holdings plans to up its manufacturing capacity. Moving forward, the company is aiming to increase 30% of its annual production capacity from1,110,000 m/t in FY10 to 1,443,335 m/t in by FY15f. Additionally, MSM Holdings will also invest in the latest machinery and refining methods to improve production efficiency. From the proceeds of RM422.5m raised from its IPO, MSM Holdings will use RM320m for this purpose alone within the next two years (refer table 2). Assuming refining capacity utilisation rate averages around 86% going forward (current utilisation rate at 84%), MSM Holdings sugar production volume will rise to 1,241,268 m/t by FY15f (+31.4%) compared to 944,703 m/t in FY10. MSM Holdings is further looking into making its presence in Asia by securing new distribution channels and establishing direct relationship with end customers. Currently, the company is exporting sugar to several countries such as to Singapore, Indonesia, Australia and Hong Kong as well as successfully penetrating into the niche market in Pakistan for sugar used in pharmaceuticals. Plan to pursue strategic acquisitions/investments. MSM Holdings plans to expand its production capacity and diversify to external markets through strategic acquisitions or investments, particularly in Southeast Asia. Producing refined sugar in external markets would enable MSM Holdings to penetrate its target more effectively thus better serve the needs of a specific market. Currently, MSM Holdings cash stands at RM87.1 million and its net debt to equity ratio is 0.09x. Therefore, MSM Holdings still has ample room for the company to raise capital via borrowing to fund its expansion. Achieving operations synergies of MSM and KGFP. MSM Holdings will take advantage on the synergies that exist between these two companies by 1) coordinating the purchase of raw sugar for both companies; 2) maximising bulk discounts in purchase of raw sugar; 3) collaboration between both companies in their hedging activities for raw sugar price and foreign currency and 4) collaboration in marketing and distribution. Raw sugar supply. There is limited supply of raw sugar in Malaysia as only 1% is produced locally while the remaining balance of 99% is imported from other countries such as Brazil, Australia, Guatemala and Thailand. 49% of the total imported raw sugar is purchased under long-term contracts of three years while another 51% is purchased at prevailing market price. Therefore, MSM will benefit from the current appreciation of ringgit against greenback as it will reduce the cost of raw sugar in the prevailing market price. 5

6 RISKS 1. Highly regulated industry. The sugar Industry in Malaysia is regulated by the Malaysian government, as it involves price controls and subsidies. If international raw sugar prices remain high, and sugar subsidies are decreased without adjusting upward the refined sugar price ceilings, it will have material and adverse impact to MSM Holding s profit margin. 2. Forex rate fluctuations. Its raw sugar cost is mostly quoted in USD while export sales are insignificant compared to domestic sales. Hence, there is exposure to forex rate movements for MSM Holdings; unfavourable movements may affect its margin. 3. Unfavourable weather conditions. Adverse weather conditions and general effects of global climate change may impact the quality of raw sugar imported and/or reduce its availability, thereby resulting rise in the raw sugar price. VALUATION At the retail IPO price of RM3.38, the PER of MSM would be 10x EPS10, 9x EPS11 and 8.1x EPS12. The market capitalisation of MSM would be RM2.38b, making it a mid-cap offering on Bursa. Our view is that it would be a challenge to ascribe high double-digit valuation multiple to MSM s earnings. Earnings growth in the sugar refining industry is likely to be sedate and nothing to be excited about. The average PER of the four regional players is 13x (see table below). Although the multiple appears high, pegging MSM s valuation to that of its regional peers would be generous. The sugar refining industry in Malaysia is highly regulated, unlike that in the other countries in the region. Local sugar refiners are subjected to various government policies and regulations, and these include price controls and subsidies. While net margin tends to be decent at around 10%, the industry is essentially a volume game but consumption growth (estimated CAGR of 4.19% from 2011 to 2016) tends to be steady rather than exciting. MSM s local peer, Tradewinds is trading at less than 5x EPS11, but sugar refining contribute only about 30% of its topline. PEER COMPARISONS Company Country Market Cap (RM m) *Forward PER FY12F Nanning Sugar Industry Co China 2, Khon Kaen Sugar Industry PCL Thailand 2, Shree Renuka Sugars Ltd India 2, Triveni Engineering and Industry India Average 13.5 *As at 6 th June 2011 Source: MIDFR, Bloomberg 6

7 Post-listing target price set at RM4.20: All considered, we are anchoring MSM s target price at 10x EPS12, which is a discount to regional peers average of 13.5x. This translates into a post-listing target price of RM4.20, which represents a potential upside of 29% to the retail IPO price. At RM4.20, its estimated current year PER is 11.2x. Dividend angle? As MSM is not that exciting from the earnings perspective, it is likely to attract more attention to its dividend payout. MSM has a dividend policy of paying out 50% of its net profit. At RM3.38, its FY10 gross dividend yield is 4.9% (4.7% at RM3.50). Net yield is 3.6%. Although this is higher than that yielded by MSM s peers, we do not think that it will excite investors as there are more attractive dividend yielding offerings on Bursa. In any case, we have the option of using the Dividend Discount Model (DDM) to value MSM, but we are of the opinion that this will be more apt for long-term price discovery. In the short-term following the listing, the market is more likely to peg MSM s valuation to earnings especially at times when the broader market is growing steadily with relatively strong foreign participation. We will be unveiling our DDM valuation for the long-term target price objective in due course. INVESTMENT STATISTICS FYE Mar (RM mn) FY09 FY10 FY11F FY12F Revenue 1, , , ,897.4 EBIT Pretax Profit Net Profit EPS (sen) EPS (%) n/a PER (x) Net Dividend (sen) Net Dividend Yield RM3.38 Source: Company, Forecasts by MIDFR,

8 FINANCIALS INCOME STATEMENT BALANCE SHEET FYE 31 Dec (RM m) F 2012F FYE 31 Dec (RM 'm) Revenue 1, , , ,897.4 Fixed Assets Cost of Sales (1,293.0) (1,746.1) (2,053.4) (2,410.6) Other LT Assets Gross Profit Cash & Near Cash EBIT Other Current Assets Pre tax profit Total Assets ,788.6 Tax (62.1) (72.9) (87.8) (93.2) Net Profit Shareholders Funds ,408.5 EPS ST Borrowings Other Current Liab Growth Rate (%) F 2012F LT Borrowings Revenue Other LT Liab Cost of Sales Total Equity & Liab ,788.6 Gross Profit EBIT Liquidity Ratios Net Profit Cash Ratio Quick Ratio Ratios F 2012F Current Ratio Gross Margin (%) EBIT Margin (%) Pre-tax Margin (%) Profit Margin (%) Source: Prospectus, Forecasts by MIDFR 8

9 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. SELL Total return is expected to be <-15% over the next 12 months. TRADING SELL Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 9