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.

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.

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.

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.

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.

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.

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 | http://research.itradecimb.com/ 2016-03-30

CIMB Securities SGX Stock Analyst Report REDUCE Downgrade ADD 0.96 Up 0.86