MSM: How high can it go?

MSM up another 46 sen to RM5.60. From the IPO listing price of RM3.38, it has increased 66% in less than 1 month time.

How high can it go?
1. Let's look at risk free rate, 10-year Malaysia Government Bond is offering 3.93% yield.
2. Based on consensus figure, MSM dividend for FY12 is expected to be 22 sen.
3. Based on the logic that MSM dividend yield cannot go below risk free yield, the maximum value for MSM should be RM5.60.

Time to really look at MSM, whether the optimism surrounding it has gone beyond logic....

MSM IPO Priced at RM3.38 or 10.2x PE

So we know it now the IPO price is RM3.38 or 97% of the "Institutional Price".

MSM is the leading sugar producer in Malaysia. Its products range from white refined sugar and soft brown sugar. The Company owns brands such as "Gula Prai" and "Gula Perlis".

My view:
1. Lack of growth story as Malaysia market is generally matured. Sugar intake will be correlated to population growth. I think 5% to 8% revenue growth is the range where the top line will grow.
2. Cost of production will swing according to global sugar price. But current downtrend in sugar price will benefit MSM. Net profit margin = 10.6% in 2008, 14.4% in 2009, 10.7% in 2010. Something like 11% net profit margin should be the case in 2011.
3. Dividend policy of at least 50% of net profit. This will translate to about 17 sen dividend or 5.0% dividend yield.
4. Conclusion: more to dividend play than growth story. Characteristic wise, it will be something like MAXIS (share price stable but give consistent dividend).