MSM Malaysia Holdings Berhad Annual Report 2019

GROUP CHIEF EXECUTIVE OFFICER REVIEW In 2019, the combination of an extended glut in global sugar supply, the weakening ringgit, locked-in high raw sugar contracts and unexpected domestic policy shifts resulting in new competition, caught MSM Malaysia Holdings Berhad (MSM or the Group) off balance leading to weaker exports, production and margins for the year. A net loss of RM299.77 million was posted for the year ended 31 December 2019, from a net profit of RM35.66 million the previous year. However, the tide has turned. Having stabilised cash flow and rationalised Group-wide capacity through consolidation of production in MSM Johor, we are currently turning setbacks into strongpoints for MSM to kick-start a turnaround journey. In the first half of the year MSM Refinery (Johor) Sdn Bhd (MSM Johor) kicked off to a smooth start despite the timing which was not providential. Our expanded production capacity created additional stress as sales orders reduced due to excess sugar supply from Thailand and India, and escalating competition domestically with the continued issuance of approved permits (AP) to import sugar. It also squeezed margins further, as MSM incurred 15% higher production cost due to lower capacity utilisation, start of depreciation, as well as the increase in gas tariffs in January and July 2019. On the sales front, total revenue of RM2 billion for the year fell 9% year- on-year, in tandem with lower average selling price (ASP) and the decline in export volumes throughout the year. The negative margins arising from lower white sugar premium reduced export volume by 24%, however, the intense price competition did not affect our sales volume for wholesale and industry segments as we recorded 3% and 6% increase respectively and we managed to defend our market share of 61% domestically. Against this backdrop, we decided to focus our efforts on ‘Attaining Balance’ which relates to the Group’s various strategic initiatives to achieve balanced cash flow management and production levels. In a bid to retain operational excellence and market leadership, MSM managed to close the year with production output of 1.07 million tonnes, an increase of 11%, compared to output in 2018 of 964,739 tonnes. IDENTIFYING STRENGTHS IN ADVERSITY Though performance was impacted by extraneous factors, a few milestones were achieved during the year. With the commercialisation of MSM Johor in April 2019, MSM is now ranked the eighth largest sugar refiner in the world by capacity. The challenge of optimising this expanded capacity presented new opportunities for expansion into new markets. The team responded quickly, researching and developing value added products such as Premix and Liquid Sugar. It was a feather in our cap when these products were made available by MSM Johor within the second half of 2019. We also further streamlined our business focus with the announced disposal of the Group’s Chuping plantation land parcels during the year, to F&N for RM156 million. ATTAINING Balance on three fronts: Operations With the full year operational availability of MSM Johor in 2019, there was a need to optimise utilisation and manage costs better. Cash Flow We embarked on a cash flow driven approach in 2019 to be able to fulfil our borrowing obligations post commercialisation of MSM Johor in April 2019. Production As MSM has excess capacity for domestic demand from three operating refineries (MSM Johor, MSM Prai, MSM Perlis), production between the refineries had to be agilely balanced, and at the same time we had to secure quality sales from the production. 21 MANAGEMENT DISCUSSION & ANALYSIS 03