MSM cuts margin prediction

by **Cals** Fri 13 Jun 2014, 02:35

Business & Markets 2014

Written by Wei Lynn Tang of theedgemalaysia.com

Thursday, 12 June 2014 10:09

KUALA LUMPUR: MSM Malaysia Holdings Bhd, the country’s largest sugar producer, has warned that profit margins this year will be lower than that in 2013 due to an influx of lower-priced foreign sugar, primarily from Thailand, into the domestic market and higher sugar prices with the removal of sugar subsidy of 34 sen.
Its president and group chief executive officer Datuk Sheikh Awab Abod said while its 2014 sugar sales volume will likely remain the same as last year, the group will “revisit” its pricing strategy, hence impacting its margins.
“We are taking some initiatives by revisiting our prices. Our margin (in 2014) will be lower compared with last year, to be competitive,” he told reporters after the group’s annual general meeting yesterday.
He did not say what the margin cut forecast is.
In the first quarter ended March 31, 2014 (1QFY14), MSM’s net margin stood at 11% compared with 12% in 1QFY13.
Sheikh Awab pointed out that the removal of sugar subsidy has led sugar prices to increase to levels higher than in Thailand, prompting Malaysian wholesalers and the industry to import.
“When the government provided subsidy on sugar, we were selling the commodity at RM2,340 per tonne. Prices have risen to RM2,680 per tonne now, making us more expensive than Thailand,” he said.
Additionally, the approved permits given to industries by the Ministry of International Trade and Industry (Miti) increased from 13 last year to 16 currently, almost doubling the tonnage of sugar imported to 150,000 tonnes from 75,000 tonnes previously, said Sheikh Awab, noting that “this has definitely affected our sales”.
He cited countries like South Korea and China where the government only allows a limited tonnage of sugar imported, with 5% import duty imposed. In Japan, importation [of sugar] is not allowed at all.
Meanwhile, Malaysia is giving import permit to industries with zero import duty, he said.
“We have had several meetings with Miti and also briefed the Economic Council. My views are that the government should protect the local industries, and should perhaps look at long-term contracts [which will expire this year] in order for Malaysia to enjoy low sugar prices now,” he added.
That aside, Sheikh Awab said the group is also taking steps to lower its production costs in order to remain competitive, which includes lower transportation costs and cost of energy.
“We are [also] looking at new streams of income. We will be going downstream, into the trading business, and we are looking into getting ourselves involved in the chartering business,” he said.
“By going downstream, I am able to have a cost reduction of US$7 to US$8 (RM22.47 to RM25.68) per tonne, as I’m in control of my vessel and trading,” he explained, adding that this would compensate the discount given to industries to be competitive. While exports accounted for 21% of group revenue last year, Sheikh Awab said that as far as this year is concerned, exports are not as crucial for its margins are thinner than the domestic market.
Nevertheless, the group will be exploring foreign markets via strategic acquisitions or investments and towards reviving its upstream activities.
“We’re talking to at least three or four others on possible joint ventures (JVs), mergers and acquisitions [for both upstream and also downstream]... We are hungry for good deals. We don’t want MSM to be where it is now. Our goal is to be a global player,” he said.
As at March 31, MSM sits on net cash of RM398.6 million.
On its partnership with Al Khaleej International, Sheikh Awab said the group applied for a new refinery licence in Johor a few weeks ago and hopes to sign a JV agreement by July or August. The refinery, which is solely for the export market, should be completed by end-2016.
The collaboration seeks to develop a new state-of-the-art sugar refinery inclusive of a logistics complex and a vessel terminal in Port of Tanjung Pelepas, Johor. On the outlook of sugar prices, Sheikh Awab anticipates that there will be a shortfall in sugar in the third quarter of next year, depending on the outcome of El Nino and the elections in Brazil.

This article first appeared in The Edge Financial Daily, on June 12, 2014.