Super Group - Maybank Kim Eng 2016-05-12: Needs topline growth to restart; D/G to HOLD

SUPER GROUP LTD S10.SI

Super Group (SUPER SP) - Needs topline growth to restart; D/G to HOLD

A lack of topline growth in 1Q16 was disappointing and does not make up for the fact that core NP was boosted by better GP margins.
In our view, the stock was cheaper before but its run-up in the past three months has priced in a lot of the recovery story and it is now valued in line with its peers.

With a tough currency comparison looming until 2H16 and heightened caution on commodity prices, we downgrade to HOLD from BUY with a lowered TP of SGD0.99, in line with the peer average of 21x.

1Q was more misses than hits where it mattered – the topline.
Core NP of SGD12.2m (-12% YoY, -16% QoQ) was below expectations at 22% of FY16E, although salved by the 1.4ppt jump in GP margin to 37.5%.
But the sales decline (-2% YoY, -15% QoQ) disappointed as 1Q is usually one of Super’s strongest quarters.
It attributed this to currency weakness (THB, MMK & MYR) but even in constant currency terms, sales were flat YoY and are still down 13% QoQ. Thailand and Myanmar were the main culprits.

Margins were boosted by lower historical raw material costs. Margins can be maintained at the higher end of 35-40% this year, if commodity prices peak after Apr/May as they usually do but this needs to be monitored.
Cash was the real star as operational cashflow jumped more than 5 times YoY. Net cash of SGD118m (+40% YoY) reached the highest level since 2012. However, the conservative management of receivables that made this possible probably indirectly contributed to the missing sales growth.

We think Super should start to use its growing cash pile to either drive organic topline growth (by spending on A&P) or to acquire growth (via M&A).
Higher A&P spending has shown to work in driving sales growth, as can be seen in the case of Malaysia, where 1Q16 revenue grew by a high single digit even with the weaker MYR.
Catalysts could come as it does so in the next few quarters even though persistent currency headwinds may blunt the positive effects till 3Q at least.

Regional currencies less volatile and/or stable over next 12 months.
Better-than-expected market reception of higher-margin new coffee products.
Better consumer sentiment in major operating markets.
China outperforms. A high-potential Branded Consumer market currently contributing 10% to revenue.

Sustained increases in commodity prices such as CPO and coffee, its key raw materials.
Much stiffer competition in major operating markets such as Thailand and Myanmar.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-12

Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 0.99 Down 1.10