Super Group - CIMB Research 2016-06-24: Enter for the long term

SUPER GROUP LTD S10.SI

Super Group - Enter for the long term

Strategy of branding, innovation and diversification already paying dividends.
New products and markets will drive the branded consumer segment, which is recovering nicely and has now turned positive on a constant currency basis.
Excess cash on the balance sheet could translate to a special dividend.
Our EPS hikes come from lower tax rates; consensus has yet to account for this.

Recent share price weakness offers good entry point. Upgrade from Reduce to Add.

Super believes its three-pronged strategy of branding, product innovation and diversification will pave the way for the company’s growth in the longer term. We concur.
We acknowledge that near-term challenges exist but the group is already starting to see its strategy bear fruit. Sales of new higher-margin products are picking up, gross margins are improving and new markets (Russia and Eastern Europe) are growing.

Super’s mainstay branded consumer (BC) segment (c.2/3 of group revenue) endured a challenging 2014-15 as it was caught in the middle of slowing ASEAN consumer spending and weak currencies. The introduction of new products (Essenso and Owl Kopitiam Roast) injected the much needed spark, and 1Q16’s 2% yoy sales growth in constant currency terms was welcoming after consecutive quarters of declines.
Further penetration into China/Thailand and new products will likely drive growth for BC.

The positives are sales decline for FI has been narrowing (1Q16: -3%) and the segment saw healthy growth in new markets, while the big negative is the structural change in China. Nonetheless, sales into China are mostly non-dairy creamers – a largely commoditised product with lower margins, so the impact to the group is relatively small.
Further, the company is seeing a recovery in Indonesia on the back of a more stable rupiah and increased roll-out of premium products (herbal extracts, freeze-dried coffee).

1Q16 net cash stood at S$115m (US$86m) or about 13% of market cap. The group has already invested in new plants in recent years and capex needs are now minimal. When quizzed on intentions, management hinted that it is open to both M&A and the possibility of a special dividend. We think either scenario will be positive for the stock.

FY15 had the additional burden of a much higher effective tax rate (25% vs. historical average of c.10%).
Management said that FY16’s tax rate will be similar to FY15, but the company has now renewed its tax incentives and FY17 should see lower tax rates. This accounted for the majority of our EPS upgrades.

We believe that recent share price weakness represents a good entry level into a stock with entrenched brand equity. At 17.3x CY16 P/E, the stock is currently trading below its historical forward P/E of 19.7x.
Upgrade to Add with our target price (S0.93) pegged at 17x CY17 P/E, based on peer average.
Key risk to our view is rising raw material costs and weak currencies.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-06-24

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