Super Group - CIMB Research 2016-03-30: Too much, too fast

Super Group - CIMB Research 2016-03-30: Too much, too fast SUPER GROUP LTD S10.SI 

Super Group - Too much, too fast 

  • We downgrade Super from Add to Reduce, as the share price has done very well post-results. We believe that the positives have been well reflected in share price. 
  • Recovery is based on stabilisation of the branded consumer (BC) business and improvement in margins. To expect a return to above 10% sales growth is a stretch. 
  • Target price raised to S$0.96. We hike target FY17x P/E from 15.5x to 17.3x (peer average). Even after that, a run-up in share price leaves no room to remain bullish. 

A recovery indeed, but not roaring like the old days 

  • Super’s share price has soared 35% since its 4Q results showed signs of an earnings growth turnaround. With share price having re-rated to 20x/18x CY16/17 P/E, we believe that most of the positives have been priced in. 
  • Super has had a torrid time in 2014-15 as ASEAN consumer markets crumbled. It is only now finding its feet. 
  • A return to topline growth rates of 18-25%, as in 2010-2013, looks unlikely in 2016-17. 

Branded consumer sales – uneven growth rates across markets 

  • 4Q overall BC sales (-1% yoy) stabilised but headline sales masked uneven growth across BC markets. Thailand (largest market) and China (4th largest) did well with double-digit 4Q sales growth yoy, which offset the sales decline in Myanmar (2nd largest. -7% to -9% in 4Q15) and double-digit contraction in the Philippines. 
  • Thailand and China are highly seasonal markets, with 4Q-1Q typically strong. We are wary of disappointment as seasonal effects taper off. 

Margins and new products to be the main growth engines for 2016 

  • Our FY16-17 sales growth projections are only 6-8% yoy. Our EPS growth forecasts (10-19% yoy) are higher only because we expect 4Q’s sterling margin performance to be sustained. 
  • Wider 2016 margins are likely to be driven by: 
    1. high BC sales mix, 
    2. new products that typically garner better margins, and 
    3. low commodity prices. 
  • The risk is that coffee and palm oil prices will rise, as inventories fall due to El Nino effects. 

Food ingredients may see patchy recovery in Southeast Asia 

  • The Food Ingredients (FI) business is still struggling. Super needs to hunt for new FI customers/markets, as the previously strong ones struggle. North Asia FI markets do not look like they will turn around soon. 
  • Uni-President and Tingyi data points show a 20% sales decline in the milk tea market. Players are focusing on new juice product launches, not milk tea. 
  • Indonesia has higher chance of turnaround, with signs of consumer revival. 

Upside surprise lies in effects of new upstream products 

  • Super’s specific strategies to cope with competition have been: 
    1. to be cost competitive, and 
    2. to premiumise generic creamer products. 
  • In the past two years, Super has gone upstream to produce liquid glucose syrup solids (LGSS) to cut transport costs and has started freeze-dried coffee powder and botanical herbal extract facilities. If the benefits show up, they would provide another leg up in margins. 

Valuations approach peer average 

  • Our key grouse is valuations. Valuations are some way ahead of smaller Malaysian rival, Old Town. 
  • Valuations have also exceeded the average of our basket of consumer peers in ASEAN. 
  • Take profit. We think that there will be a better time to come back to Super.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | 2016-03-30
CIMB Securities SGX Stock Analyst Report REDUCE Downgrade ADD 0.96 Up 0.86