Super Group - UOB Kay Hian 2016-02-25: 2015 Lacklustre Results, Looking At Gradual Recovery in 2016

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SUPER GROUP LTD S10.SI 

Super Group (SUPER SP) 2015: Lacklustre Results, Looking At Gradual Recovery in 2016 

• 2015 results are broadly in line with our and consensus estimates. 
• We have raised 2016 estimates slightly by 3% to build in higher top-line growth. 
• While we expect 2016 to recover from a low base on the back of new product launches and growth in demand from China, we believe the stock will only re-rate on more data points of an earnings recovery. 
• Maintain HOLD with PE-based fair value of S$0.87 (previously S$0.85). Entry price: S$0.70. 

RESULTS 

 Lacklustre 2015 results; broadly in line with market and our expectations. 

• Super Group's 2015 net profit was S$47.3m (-31% yoy). However, excluding exceptional items, its adjusted net profit of S$44.3m declined 24% yoy, which was broadly in line with our and market forecasts of S$41m-45m. 
• The slight surprise came from lower raw material costs (coffee bean and palm kernel oil) in 4Q15, coupled with a larger composition of branded consumer sales which carried a higher gross profit margin. 

 Weak consumer and food ingredient sales. 

• In 2015, Super reported a revenue decline of 6% yoy in both its Branded consumer (BC) (-3% yoy) and Food ingredient segment (FI) (-10% yoy). 
• The drag in the BC segment came from lower sales in the Philippines, Malaysia, Indonesia and Eastern Europe markets, partially offset by higher sales into the Myanmar and China markets. 
• Meanwhile, sales in FI segment were impacted by flagging sales into Indonesia and China. 

 Continued pressure on margin. 

• Net margin fell -3.4ppt due to higher depreciation following the completion of several expansion projects (Tuas plant extension and new Botanical Herbal Extract plant) as well as higher effective tax of 25% (withholding tax and expiry of tax incentives enjoyed by overseas subsidiary) compared with 12% in 2014. 

ESSENTIALS 

 Cash generative business model. 

• Super proposed a final dividend of 1.2 S cents per share, bringing 2015 DPS to 2.2 S cents per share. While this is a yoy decrease of -29% from FY14 (3.1 S cents), dividend payout (51.4%) is above the long-term track record of 50% payout. 
• Going forward, we expect dividend payout of 50% to be sustainable, as cashflow generation capabilities remain strong on the back of lower capex need from 2016 onwards. 
• Super currently has net cash of S$96.5m (S$0.09/share) and forecast free cash flow of more than S$55m p.a. 

 Focus on China. 

• While Thailand remains the biggest revenue contributor for Super’s BC business (30-32% of group BC turnover), China is fast gaining momentum, with sales estimated at high double-digit growth of 30%, accounting for 11-12% of group BC turnover. 
• Going forward, management will focus on increasing marketing and branding efforts in China, targeted at the rising middle class, who are likely to be more attuned to imported brands and quality products. 
• Super is also looking at distribution via e-commerce platforms such as an online supermarket. 

 Modest on 2016; poised for long-term growth instead. 

• 2016 is anticipated to be a challenging year, given the macroeconomic uncertainties, currency fluctuations as well as pricing competition. 
• Nevertheless, Super remains positive that its long-term growth strategy of branding, innovation and diversification will help it navigate the difficult economic environment. 
• We can expect more new product launches in 2016, possibly beyond the coffee segment to tea and cereal, as Super looks to develop itself as a consumer business. 
• While it is too early to see material results from recent product launches such as ESSENSO MicroGround and Owl Kopitiam Roast, management has cited the results so far as encouraging, following repeated purchases from supermarkets and distributors. 

EARNINGS REVISION/RISK 

 End of earnings cut, introduce 2018 estimates. 

• We adjusted our 2016 net profit forecast slightly upwards by 3% to factor in higher top-line growth. We think that 2016 is likely to see a slight improvement in earnings as new product launches, expansion initiatives and branding exercises start to bear fruits. 
• Additionally, we introduce our 2018 estimates. 
• Key risks, in our view, are: 
  1. higher raw material prices, 
  2. currency risks, and 
  3. execution risks in China. 

VALUATION/RECOMMENDATION 

 HOLD for now, wait to buy for a recovery play. 

• Maintain HOLD with a PE-based target price largely unchanged at S$0.87 (previously S$0.85), based on its 2016F regional peers valuation of 19.3x. 
• The group’s strong cashflow generation capabilities remain attractive in view of tapering capex from 2016 onwards, opening up capacity for potential M&As in markets such as Indonesia and Malaysia. 

SHARE PRICE CATALYST 

Possible share price catalysts include:

1. pick-up in branded sales momentum in key markets, 
2. strong momentum from China branded segment, and 
3. potential accretive M&A. 

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-25

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.87 Up 0.85