SUMI: Earnings Miss Expectations, Forecasts Trimmed Amid Market Headwinds

Sumisaujana Group Bhd (Sumi) reported its 9MFY25 financial results, which significantly fell short of analyst expectations, achieving only 35% of full-year estimates. The shortfall was primarily driven by lower-than-anticipated revenue growth and compressed margins. Following these results, Mercury Securities has slashed its earnings forecasts for FY25E/FY26E and correspondingly lowered the target price, while maintaining a “Hold” recommendation on the stock.

Performance Review

For the nine months ending FY25, Sumi’s net profit stood at RM5.7 million, representing only 35% of the firm’s full-year estimates of RM12 million. Revenue reached RM118.3 million, or 69% of the full-year forecast. Quarter-on-quarter (QoQ), the group experienced an 18% rebound in topline performance, recovering from a 2% decline in 2QFY25. This growth was attributed to stronger demand from Malaysia (over 100%), Indonesia (+25%), and other international markets, alongside the partial delivery of a secured contract that contributed RM19.8 million in revenue during the quarter. However, despite the topline recovery, gross profit fell 32% QoQ, and pre-tax profit (PBT) saw a substantial 84% QoQ decline. Margins were severely impacted, with gross profit margins eroding by 14 percentage points to 21% due to selling pressure and an unfavourable product mix. PBT margins were also affected by the stronger Malaysian Ringgit’s impact on the group’s US dollar-denominated business and a high effective tax rate.

Factors Behind Underperformance

The underperformance against expectations was mainly due to several factors. These included lower-than-expected revenue growth resulting from slow execution of manufacturing contracts with local US manufacturers, reduced demand from certain Asian and Middle Eastern markets amid geopolitical tensions, and competitive pricing strategies as Sumi aimed to gain market share. A less favorable product mix further exacerbated the margin erosion. The group also incurred a higher effective tax rate of 29% for 9MFY25, compared to 17% in FY24, which further compressed net profitability.

Future Outlook and Strategic Initiatives

Despite current challenges, management expects the outlook for the oil and gas sector to remain broadly stable. The group anticipates selective growth opportunities, particularly with a US manufacturing contract that commenced in October, which is expected to fully contribute to its Trading & Support Services segment in 4QFY25. Management remains confident that new R&D developments will help elevate gross profit margins to the 30% range by CY2026. Sumi is also actively pursuing strategic initiatives to expand its market presence both domestically and internationally. This includes broadening its product range to include oleochemicals for industrial applications and exploring new production facilities in North America and the Middle East. Furthermore, the company aims to diversify growth through innovation, leveraging a licensing agreement with the Malaysian Palm Oil Board (MPOB) to produce palm-based polyols and bio-chemicals.

Valuation and Recommendation

In response to the weaker 9MFY25 performance, Mercury Securities has significantly cut its FY25E and FY26E earnings estimates by 57% and 37% respectively, revising them to RM5 million and RM7 million. Consequently, the target price has been slashed by 37% to RM0.088 (previously RM0.14), based on a 17.5x FY26E EPS multiple, which represents a 50% discount to global peers. Despite a recent retracement in its share price, valuations are still considered demanding. As a result, the investment bank has reiterated its “Hold” recommendation for Sumi.