MSM Malaysia Holdings Berhad (MSM MK) has faced an unexpected dip in its earnings due to higher production costs and a provision for net realisable value (NRV). The company's target price has been revised significantly, leading to a downgrade in its investment rating.

In the first half of FY24, MSM reported a robust increase in revenue, reaching RM833.1 million, which is an 11.6% year-on-year rise. This brings the total revenue for the first half of the year to RM1.74 billion, a 30.4% increase year-to-date. The growth was driven by higher average selling prices and improved sales of new mixed products. However, despite this revenue growth, earnings were adversely affected by a significant rise in production costs, which surged by 14% year-on-year. The higher costs, including those for raw sugar, freight, and a weakened ringgit, eroded profit margins, resulting in a loss of RM32.4 million in the recent quarter. Additionally, an NRV provision due to the inflated inventory value compared to market prices further impacted earnings. The influx of cheaper sugar imports from Asia Pacific (AP) has made MSM's products less competitive.

MIDF Stock Broking House has downgraded MSM to a NEUTRAL rating, reducing the target price from RM3.60 to RM1.39. This new target price reflects a revised earnings forecast, which has been lowered substantially by 79% for FY24, 61% for FY25, and 51% for FY26. The downgrade is attributed to ongoing challenges, including the competitive pressure from cheaper imports and the high costs associated with refining. Despite maintaining a decent utilisation factor of around 50% and a yield above 96%, these operational strengths have been overshadowed by market pressures and elevated production costs.

The company's share price currently stands at RM1.48, with an expected share price return of -6.38% and a dividend yield of 2.03%. The anticipated total return is -4.36%.

Source: MIDF
Title: Unexpected Results Due to NRV Provision