Super Group - DBS Research 2016-08-12: More muted growth outlook

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SUPER GROUP LTD. S10.SI

Super Group - More muted growth outlook

• 2Q16 earnings below as sales and margins disappointed.
• DPS of 1 Scts declared.
• Cut FY16-17F earnings by 6-10%.
• Maintain HOLD with lower S$0.87 TP. 

Maintain HOLD, lower TP to S$0.87. 

• We maintain our neutral stance on Super Group (SUPER). 
• 2Q16 earnings disappointed our earnings forecasts both in terms of sales and margins. 
• Our TP is reduced to S$0.87 based on 20x FY17F earnings as we trimmed our earnings estimates. 
• While we believe SUPER is on a recovery mode, we expect the pace of recovery to be modest. We see growth driven by new product launches and higher margin products, but weak regional consumer sentiment could dampen prospects.
• Trading at 18.0x FY17F PE, representing -1SD of its 4-year mean, valuations are reflective of muted earnings momentum ahead. Hence, we maintain our neutral stance on the stock for now.

Disappointing 2Q16 earnings, muted outlook. 

• 2Q16 earnings was 5% lower y-o-y at S$10m on the back of an 8% drop in revenue to S$115m, dragged by weaker sales to Myanmar for Branded Consumer and weak sales to Indonesia and Philippines for the Ingredients segment. There was also higher opex incurred on higher A&P and staff costs, hence EBIT margins were lower despite higher gross margins. 
• As weak regional consumer sentiment continues to dampen growth outlook, we have lowered our FY16-17F earnings estimates as benefits from new higher margin products and operational efficiencies will be challenged by a weak sales outlook.

Valuation

• Pegged to 20x PE. We lower our target price to S$0.87, based on 20x price earnings multiple on FY17F earnings, as we cut FY17F earnings by 10%. 
• Upside is capped even after factoring FY17F’s growth prospects.

Key Risks to Our View

• Surge in commodity prices. We expect SUPER to enjoy the benefits of lower coffee bean prices of c.US$1,500/mt to US$1,700/mt compared to an average of US$2,000 in 2014.
• This should aid margins going forward. Poor weather could impede our positive margin outlook and derail our earnings estimates for the stock.

Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-12

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.87 Down 0.970