Super Group - UOB Kay Hian 2016-05-30: Challenging 2016 Priced In; Upgrade To HOLD And Awaiting Further Catalysts

SUPER GROUP LTD S10.SI

Super Group (SUPER SP) - Challenging 2016 Priced In; Upgrade To HOLD And Awaiting Further Catalysts

We upgrade Super to HOLD as share price has retraced by over 20% since our SELL downgrade.
Our PE-based target price is $0.85 (vs peers’ 18.6x FY17F PE).
While we think earnings recovery will be gradual, we believe downside risk is limited and look for potential positive catalysts to accumulate.

We upgrade Super Group (Super) to HOLD from SELL after share price declined by over 20% since our downgrade. This report also highlights the takeaways after our recent meeting with management.

Key product non-dairy creamer (NDC) has faced several challenges for the past quarters, largely due to changing consumer preference as well as weaker demand from key brand clients in China slowing down as competition in the beverage industry intensifies.
Nevertheless, we anticipate that higher-margin products, such as freeze dried coffee powder and nutritional oil powder, will provide support for the FI segment.
Already, we are seeing some positive data points from Super’s move up the value chain. Freeze-dried coffee boosted soluble coffee powder revenue to about S$17m in 1Q16 (+6% yoy). Super also has set up a food service arm in 1Q16 to strengthen its marketing and distribution capabilities in the hotel, restaurant and café sectors. We believe these initiatives will support the FI business in the longer term.
Overall, we anticipate a low- to mid-single-digit growth in the FI segment for 2016 and for growth to pick up more substantially in 2017.

After spending 2015 rationalising product mix and SKUs, Super has targeted 2016 to be a year of new product launches. In May, Super kicked off the advertising and promotions (A&P) of Essenso coffee in Thailand.
With Super targeting to launch at least one new product for each quarter, if well received, we will likely see a staggered growth trajectory for the remaining of 2016.
Amid soft consumer sentiment as well as aggressive promotions by competitor Nestle, we believe Super will continue to step up its A&P activities to drive top- line growth and market share.
Given the crowded space for instant mix coffee, we also believe diversification into other products such as cereals and tea will help support BC growth, especially in China, which has traditionally more of a tea drinking culture.

We understand the slowdown in growth momentum in Super’s China BC sales in 1Q16 was largely due to pacing of A&P in lieu of new product launches as well as a general market slowdown in China. Nevertheless, we believe China may potentially be a bright spot for Super.
We view that Singapore brands can hold a premium in China amid increasing affluence of Chinese consumers and food safety concerns. A survey by McKinsey highlights nearly 20% of digital consumers in China buy from e-commerce vendors outside of China, where cross border shoppers prefer items that are either too expensive or too scarce domestically.
Moreover, Super has been gaining momentum on the ecommerce sales front and has expanded out of Jiangsu region to Chengdu as well as Wuhan.

Despite our HOLD recommendation, we would turn more positive if we see:
1. More sales of higher-margin products. Premium FI products such as botanical herbal extracts and nutritional oil powder are currently fetching utilisation rates of c.15%, leaving room for more growth upside. Meanwhile, we believe visibility on earnings contribution from high-margin BC products such as Essenso and Owl Kopitiam Roast should kick in by 2H16.
2. Accretive M&A or capital management. Super's cash generation capabilities remained strong on the back of lower capex needs from 2016. The company has net cash of S$115.4m (S$0.10/share). Potential catalysts include accretive M&A or capital management as we believe there is potential for Super to raise its dividends.

No change to our earnings forecasts. We project a 3-year earnings CAGR of 8% for 2016-18.

Upgrade to HOLD. Post our SELL report on 21 Mar 16, share price has declined more than 20%. As such, we upgrade Super to HOLD with a target price of S$0.85 (previously S$0.88), pegged at 18.6x 2017F PE. Entry price is S$0.77.

Possible catalysts include:
1. pick-up in BC sales momentum in key markets,
2. strong momentum from China BC segment, and
3. potential accretive M&A.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-30

UOB Kay Hian SGX Stock Analyst Report HOLD Upgrade SELL 0.85 Down 0.88