Super Group - CIMB Research 2016-02-24: Margins are sustainable

SUPER GROUP LTD S10.SI

Super Group - Margins are sustainable

We believe that Super Group is past the trough of its earnings downgrade cycle.
Key points gathered in post-results briefing are:
1. BC sales recovery was due to a combination of factors, not just new products; and
2. 4Q margins are sustainable.

Our Add call, forecasts and target price (15.5x CY17 P/E, historical mean, S$0.86) are intact. Catalysts are traction in new products and evidence of sustained margins.

Key 4Q positive was the jump in overall gross margins to 38.6%. Management explained this was due to lower raw material costs and better sales mix.
Branded Consumer (BC) garners gross margins of ~40%. Food Ingredients (FI) gross margins are ~25%. The recovery in BC sales helped sales mix.
Raw material prices have been trending down since early 2015, but a rise in margins had not shown up earlier because there were depreciation charges on some initiatives taken in 2014; those charges ended in 3Q, i.e. current GP margins can sustain.

4Q BC sales was -1% yoy, better than the -4% to -5% yoy showing in 1Q-3Q. Part of the reason was the launch of new products in Singapore and Malaysia. The other was that key market Thailand is growing and new market China is doing very well.

On BC sales, Thailand (30-32% of BC) had 4Q sales growth of 11-13% yoy. Myanmar (18-19% of BC) is still suffering from a weak kyat and 4Q sales decreased 8-9% yoy.
Malaysia (15% of BC) and Singapore (9-10%of BC) have reverted to growth of 4-5% yoy, on the back of new product launches (Essenso and Owl). Singapore though, has lost its position as the 4th largest market as China has grown rapidly. The Philippines, previously Super’s 5 th largest market, has struggled and is now at the bottom of the pile.
China sales (11-12% of BC) increased > 30% yoy. The China strategy is to lean onto a nascent coffee culture among the mass affluent, in first- and second-tier cities. Among the distribution channels, Super has had notable success selling through e-channels.

ASEAN markets continue to look challenging, with currencies that can still weaken against the dollar, like in 2015. Also, pricing competition remains stiff.
The corporate strategy catchphrase “Branding, Innovation and Diversification” means profit is more likely to come through margins than rapid sales growth, in our view.
Branding and innovation has seen the birth of Essenso and the new Owl. The new concepts will be exported out of Singapore, Malaysia into the ASEAN region this year. There are also new cereal and tea products planned for 2016.
On diversification efforts, Super has widened its BC distribution networks to the Middle East region. It also intends to diversify FI sales to Africa and the Middle East.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2016-02-24

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