MSM Malaysia Holdings Berhad Annual Report 2019

GROUP FINANCIAL REVIEW Assets: During the year, MSM Perlis Sdn Bhd had signed an agreement with F&N Agrivalley Sdn Bhd for the sale of plantation land in Chuping, Perlis for RM156 million. Fixed assets have thus reduced due to reclassification of Chuping Plantation Land to Assets Held for Sale, and impairment on assets of RM140 million due to this change in Group’s strategy. On 9 April 2020, MSM Perlis Sdn Bhd had exercised its rights to rescind the sale and purchase agreement. As of the date of this report, the Group continues with its plan to sell the plantation land and it is of the view that the sales consideration in the sale and purchase agreement with F&N of RM156,000,000 remains the most reflective market value to be used as fair value less costs to sell for the purposes of measurement of the assets held for sale. Liabilities: Liabilities have reduced in 2019 due to lower raw sugar stockholding which resulted in lower payables. Raw sugar stock reduced to 91,374 tonnes in December 2019 compared to December 2018 of 366,110 tonnes. In addition, long-term debts were restructured and rescheduled to ease cash flow over the short term. Capital Resources MSM’s gearing ratio was sustained at 36% in 2019, resulted primarily from borrowings for the construction of MSM Johor. But liabilities have reduced due to net repayment of borrowings during the year. STRENGTHENING FINANCIAL SUSTAINABILITY The main order of business within this competitive landscape was to maintain market leadership. The Group ramped up marketing strategies and service delivery to maintain domestic market share at 61% amidst the influx of competitors and actively explored new export market possibilities. The latter led to introduction of value-added sugar products, such as premix and sugar syrup, to the Asian market in the second half of 2019. Strategic partnership opportunities for export and diversifying income stream were also explored to increase the utilisation of MSM Johor. Nonetheless, this still could not cover the targeted utilisation due to low premiums on the export front. The surplus situation had adversely impacted the export premium of refined sugar as a result of narrowing margins. As part of MSM’s strategy to monetise non-core assets. In October 2019, we signed an agreement with F&N Agrivalley Sdn Bhd for the sale of plantation land in Chuping, Perlis. On 9 April 2020, MSM Perlis Sdn Bhd had exercised its rights to rescind the sale and purchase agreement entered on 8 October 2019. Despite the rescission, the Group believes that it will be able to settle its term loan based on its contractual due dates. Further, towards improving cash flow, stockholding cost has been reduced significantly by reducing raw sugar stockholding. We managed to close 2019 at USD 13.15 cents/lbs due to the surplus production globally. Unfortunately, the surplus situation had affected refined sugar export premium and the market was trending at about RM1,400 – RM1,500 per tonne which was lower than the Group’s production cost. 2020 FINANCIAL PRIORITIES Forecasts generally point to an impending sugar deficit in 2020, mainly from decrease in production from Thailand due to drought. This deficit is estimated to fetch up to 8 million tonnes, which puts projection for Raw Sugar NY#11 for 2020 between USD13 to 15 cents/lb. Management’s main focus for the year will be to: i) Restructure Group’s operation through consolidation of production ii) Implement various initiatives to reduce operating cost mainly from energy consumption, logistics and distributions iii) Maximise efficiency of the Group’s refineries iv) Increase production of value-added products such as sugar syrup, fine syrup and premix mainly for export market v) Diversify into food-related products for additional income streams vi) Review MSM’s domestic business model to fatten sales margin Moving forward, the Group remains cognizant of risks to our sales margin given the continued prevalence of APs for import sugar in the market. MSM continues to engage with the government and relevant authorities in monitoring the situation and advise them of the Group’s capabilities in meeting domestic market needs. Additionally, as the price of raw sugar and FOREX rates have a high impact on MSM’s margins, the Group is committed to close monitoring of the market to cautiously hedge within the Group’s mandate and policy. In the meanwhile, MSM Group continues to review the domestic business model to fatten sales margin by increasing selling price to wholesalers and raising the premium for the Industry segment. In sustaining cash flow, the Group is leveraging on just-in-time raw sugar procurement while continuing to sell selected non- core assets to pare down borrowings. MSM Malaysia Holdings Berhad | Annual Report 2019 32