Super Group - UOB Kay Hian 2016-03-21: Recovery Underway But Priced In; Downgrade To SELL

SUPER GROUP LTD S10.SI

Super Group (SUPER SP) - Recovery Underway But Priced In; Downgrade To SELL

Super is executing its long-term initiatives well and we anticipate a gradual recovery from 2016.
However, we downgrade the stock to SELL after its 27% price appreciation ytd as we believe valuations may have fully priced in improving fundamentals. Target price: S$0.93.

We spoke with Super Group’s (Super) management recently. This note highlights the key takeaways and our latest views on the company as we progress into 1Q16.
While we continue to be positive on Super’s 2016 outlook and its long-term strategy, we downgrade the stock to SELL as the stock’s 27% ytd price rally may have fully priced in the improving outlook. Our target price is S$0.93 (previously S$0.87), based on peers’ average valuation of 20x 2016F PE.

With the Chinese New Year festive period falling in the first quarter of 2016, we understand that price competition remains stiff in Singapore and Malaysia, as established players such as Nestle adopts discounts to maintain its market share.
Meanwhile, key markets such as Thailand remains relatively resilient to price competition and staple product categories continue to be in demand.

Going into 2016, we anticipate upward cost pressure in raw materials. While Super benefitted from lower raw material costs in 2015, we note crude palm kernel oil as well as Robusta coffee prices have since been trending up.
Nevertheless, Super’s strategy of buying forward its key raw materials will provide greater cost visibility. Additionally, we see higher utilisation of existing plants going forward (currently 60%), which will partly alleviate the production cost pressure as economies of scale kicks in.

Super’s China segment, which accounts for 11-12% of branded consumer (BC) turnover, has grown from a low base to overtake Singapore as the fourth-biggest BC revenue generator.
While Super concentrates more in the Jiangsu area (an eastern coastal province), we believe there could be potential partnerships with distributors to widen the network to tier-one cities in the medium to long term.
Furthermore, we are fairly upbeat on Super’s e-commerce play in China, with brand promotions via social media platforms (eg QQ and Wechat) as well as through ecommerce distribution channels such as online supermarkets.
Apart from a more extensive consumer outreach, an additional upside from utilising social influences is the potential cost savings in selling and distribution (S&D) compared with traditional print/television ads.
We expect S&D expense as a percentage of turnover to be at the range of 11-13% in 2016.

As Super executes its “Branding, Innovation and Diversification” strategy, we foresee 2016 to be a year of new product offerings targeted at the “masstige” level (prestige for the mass segment).
Recently launched products such as Essenso and Owl Kopitiam Roast coffee (margins of 38-40%) are already seeing promising results following repeated purchases from distributors.
While previously launched only in Singapore and Malaysia, these products will be introduced to other key markets over the next few quarters. As Super seeks to find its footing in the wider consumer segment, we can also expect more new launches beyond coffee products, especially in higher-margin segments such as cereal and tea.

On our new estimates, the group is expected to register a 3-year net profit CAGR of 12.7%.
Fundamentally, we remain positive on a gradual earnings recovery as new product launches and branding exercises start to bear fruit.

Based on our new earnings estimates and regional peers’ average valuation of 20.0x 2016F PE, our target price is S$0.93 (previously S$0.87).
Even with our slight upwards earnings adjustment, from a valuation perspective, Super is still trading unattractively at 22.9x 2016F PE and 20.8x 2017F PE, a 14-18% premium to regional consumer peers’ of 20.1x and 17.6x respectively.
We view the premium is not warranted, given the group’s lower-than-peer FY16F ROE of 9.6% (sector: 24.4%). Even excluding outlier, peers’ average FY16F ROE of 13.1% is still 3.5ppt higher than Super’s.
Moreover, Super’s 2016F PE of 22.9x is slightly more than its +1SD to mean PE of 20.8x, which is too high as its 2016-18F ROE of 9.6%- 10.2% compares with its long-term average ROE of 13.9% since 2001.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-21

UOB Kay Hian SGX Stock Analyst Report SELL Downgrade HOLD 0.93 Up 0.87