UOB Kay Hian 2015-08-12: Super Group Ltd - 1H15; Weak Prospects Priced In But Lacking Catalysts. Maintain HOLD.

SUPER GROUP LTD S10.SI

1H15: Weak Prospects Priced In But Lacking Catalysts

1H15 results remained weak and were below our and consensus estimates.
We cut 2015-17 net profit estimates by up to 15% but maintain HOLD following the 17% ytd fall in share price.
Our PE-based target price is S$1.00 (previously S$1.25).
Entry price: S$0.90.

Adjusted 1H15 net profit fell 28% yoy to S$23m and was below our and market expectations. 1H15 turnover declined 4% yoy on lower branded consumer (BC) sales (-5% yoy) and food ingredient (FI) sales (-1% yoy).
We understand the main drag on BC sales was from the Philippines (streamlining of product portfolio) and Eastern Europe (economic woes on lower oil prices and currency).
As for FI, the downward pressure came primarily from China due to intense price competition in the non-dairy creamer segment.
Elsewhere, we were disappointed by the higher effective tax of 24% due to expiry of tax incentives for its overseas subsidiary.

Gross margin fell 0.7ppt to 35.8% in 1H15 due higher depreciation (+64%) expenses. This is due to the completion of selected expansion projects, including the Botanical Herb Extract facility in 2H14.
The proportion of BC and FI sales to group turnover was relatively stable at 67% and 33% respectively in 1H15.
An interim dividend of 1.0 cent/share (unchanged) was announced.

While there are signs that selected BC markets could stabilise, we believe overall conditions remain challenging.
Competition remains intense with price discounting and poor sentiment impacting markets such as Singapore and Malaysia.
In Myanmar, there are specific issues such as the general elections in 4Q15 and a volatile currency.
Philippines continue to be a tough market, with Super and its joint venture partner having a small market share and undergoing rationalisation.
The only bright spark in the BC segment is the continued growth in China, which continues to grow from a low base.
We estimate China accounts for 6-7% of group BC turnover.

Given the tough conditions in 1H15, management plans to launch new products in late-3Q15.
As for the intense competition in FI, particularly non-dairy creamer, management has begun marketing differentiated products, such nutritional oil powder (NOP) and botanical herb extracts.
While we think the acceptance for new products may need time to ramp up, we believe these differentiated and premium products would result in better customer loyalty and cushion the group from intense price competition in the generic non-dairy creamer segment.

We cut 2015-17 net profit forecasts by up to 15% to reflect tough prospects for both the BC and FI segments.
Also, we had adjusted our effective tax rate to 24% (from 20%) for 2015-17. After the revision, our 2015-17 net profit forecasts are 20- 23% below consensus estimates.
Key risks, in our view, are:
1. higher raw material prices,
2. irrational competition in FI & BC markets, and
3. execution risks in China.

Share price has declined 17% ytd.
Maintain HOLD with a lower PE-based target price of S$1.00 (previously S$1.25), which is based on regional peers’ average valuation of 20.0x 2016F PE.
Entry price is S$0.90.

Possible share price catalysts include:
1. pick-up in BC sales momentum in key markets,
2. lower costs of raw materials, such as palm kernel oil/coffee,
3. strong momentum from China BC segment, and
4. potential accretive M&A.

Andrew Chow CFA | http://research.uobkayhian.com/ UOB Kay Hian Research 2015-08-12

HOLD Maintain HOLD 1.00 Down 1.25