Super Group - DBS Research 2016-05-12: Narrowing earnings decline

Super Group - DBS Research 2016-05-12: Narrowing earnings decline SUPER GROUP LTD S10.SI 

Super Group - Narrowing earnings decline

  • 1Q16 earnings in line boosted by soluble coffee powder sales
  • Earnings declining at a lower rate
  • Expect earnings to grow by 7% y-o-y in FY16F
  • Maintain HOLD, TP S$0.97.

1Q16 within expectations. 

  • Earnings were S$11.6m (- 15%, y-o-y) on the back of S$119m of revenue (-2% y-o- y). Even though revenue and earnings have continued to decline, the underperformance on a y-o-y basis has become sequentially smaller. 
  • We hold the view that earnings will grow in FY16F after registering a 31% y-o-y drop in FY15. 
  • This current set of results has validated that Super is on track for earnings recovery.

Ingredient sales shows sequential improvement. 

  • Revenue drop of 2% is driven by a sequentially smaller decline in Ingredients segment (-2.7% y-o-y, S$36.5m), improving from the 20% fall in 4Q15. 
  • Sales of freeze-dried soluble coffee powder and sales into Indonesia and Malaysia contributed positively to revenue. However, the drag came from lower sales from China, Philippines and non- dairy creamer.

Branded consumer sales positive in local currency terms. 

  • Branded consumer sales (S$83m) declined by 1.4% y-o-y due to weaker foreign currency translation in the form of THB and MYR. Sales in local currency terms improved 2% y-o-y. 
  • For coffee products in particular, there was 0.7% y-o-y improvement in sales after four consecutive quarters of y-o-y declines. New products ESSENSO MicroGround Coffee and Owl Kopitiam Roast & Ground Coffee, and promotions in Singapore, Malaysia and Philippines contributed positively. But these were offset by lower sales into China, Thailand (FX translation and lower A&P), and Myanmar (ASP reduction).

Stable EBIT margins. 

  • Gross margins improved, but higher opex meant that EBIT margins remained stable at 14%. 
  • Gross margins were 37.5% (+1.4ppt y-o-y, -1.1ppt q-o-q) on more favourable raw material prices of coffee beans and palm kernel oil. This was mitigated by higher opex which, as a percentage of sales, expanded 1.8ppt to 24.5% on higher A&P, personnel costs and depreciation charges.

Headline net profit dragged by FX, taxes. 

  • Although core operations have shown some signs of stability, headline net profit has declined more than revenue. 
  • Key items include FX losses of S$0.7m and comparatively higher effective tax rates (24.3% vs 20.5% for 1Q15) largely from the expiry of tax incentives from overseas subsidiaries.

Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-12
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.97 Same 0.97