Super Group (SUPER SP) - Maybank Kim Eng 2016-11-03: Going Dutch

Super Group (SUPER SP) - Maybank Kim Eng 2016-11-03: Going Dutch SUPER GROUP LTD. S10.SI

Super Group (SUPER SP) - Going Dutch

Courage from coffee; accept SGD1.30 offer, if made 

  • Jacobs Douwe Egberts (JDE), a Dutch coffee & tea company ultimately owned by a global consolidator of coffee concerns, JAB Holdings, has announced that it intends to offer SGD1.30 a share in cash for Super Group, if certain pre-conditions are met. 
  • We think that JDE, if it makes the offer, is sincerely valuing Super at reasonable valuations of c.31x historical P/E, c.15x EV/EBITDA and 2.8x book. 
  • We should have no problem advising minority shareholders to ACCEPT THE OFFER, if it is made. This is especially pertinent in today’s environment of weak topline growth that has weakened the bargaining power of food suppliers.

Must first clear anti-trust hurdles before offer made 

  • The pre-conditions are all related to anti-trust hurdles. 
  • Specifically, China and Philippines were highlighted, but the text of the joint announcement appears to suggest that other jurisdictions are included as well. Where that is concerned, Super and JDE combined in Singapore, Thailand and China, three countries where both companies have substantial sales, will be 25.7%, 13.8% and 12.9%, respectively. Neither company has significant market share in Philippines and Malaysia. 
  • Given that Nestle dominates each market by far, we do not envision that JDE will encounter much anti-competition resistance.

Likelihood of offer success, if made, is high 

  • If JDE eventually makes the offer, we doubt that there will be a competing offer. Given that major shareholders collectively holding 60% of shares outstanding have already given irrevocable undertakings to accept JDE’s offer, even if there is a higher bid, the offer would already have gone unconditional. A competing bid will have no chance of succeeding, in our view.
  • However, it may take some time We note that the 3 May 2017 long-stop is for the offer to be made by JDE, not for the offer to be completed. Essentially, the timing will depend on the individual anti-trust authorities.

1. A super-charged offer in the works 

1.1 Dutch company may make SGD1.30 offer for Super 

  • Super has announced that Jacob Douwe Egberts (JDE) intends to make a voluntary conditional general offer of SGD1.30 a share in cash. The offer will be made by Sapphire Investments, a wholly-owned subsidiary of JDE.
  • JDE is a coffee & tea company best known in this part of the world for its Jacobs and Moccona coffee brands. It is part of JAB Holdings, a privatelyowned investment group that has been buying up coffee and other consumer products businesses around the world, including the USD13.9b buyout of Keurig Green Mountain last year. Besides this, it has ownership in several other coffee brands, personal beauty company Coty, doughnut company Krispy Kreme and luxury shoe companies Bally and Jimmy Choo.

1.2 Conditional on obtaining anti-trust clearances 

  • To be clear, JDE has not yet made an offer. It intends to do that only when it has satisfied certain anti-trust hurdles in China, the Philippines and other jurisdictions that may apply.
  • China: The Ministry of Commerce must confirm that it will not further review the offer, allow the offer to go ahead without conditions or conditions that JDE will consider to be reasonably satisfactory and confirm that all applicable waiting periods under China’s AntiMonopoly Law have expired.
  • Philippines: The Philippines Competition Commission must confirm that it will not further review the offer, allow the offer to go ahead without conditions or conditions that JDE will consider to be reasonably satisfactory and confirm that all applicable waiting periods under China’s Anti-Monopoly Law have expired.
  • Any other jurisdictions: If JDE identifies any other country where relevant anti-trust authorisations may be triggered by the offer, the appropriate authorisations must be obtained on terms that are satisfactory, and conditions on relevant waiting periods are satisfied.
  • We do not envision that anti-trust issues would be a significant hurdle, given that Nestle dominates each market by far. According to Euromonitor, JDE has >12% market share in China whereas Super had 0.6% in 2015 and the combined company will be only slightly larger. Similarly, the combined market share of both companies in Thailand would be only about 14% if the deal goes ahead, far from Nestle’s 66%. Neither company even shows up in the Philippines’ market share rankings, but the Philippines was emphasized as a pre-condition probably because their recently-passed Competition Act has a low asset threshold of 1b pesos (USD20m) that could void the deal if procedures are not followed.

1.3 What’s next for minority shareholders? 

  • Only upon receipt of the approvals from anti-trust authorities, will JDE make the offer. There is a long-stop date of 3 May 2017 on this. After receipt of the offer, Super will appoint an independent financial adviser to evaluate the fairness of the offer.
  • As far as the major shareholders (namely the Te and Teo founding families as well as independent shareholders Sam Goi, Mr Goi’s company Tee Yih Jia Food Manufacturing, and Yeo Hiap Seng) are concerned, they have already given irrevocable undertakings to JDE to accept the offer. Given that the collective stake held by them is 60%, this means the offer, when it is eventually made, will already be unconditional. A competing offer will have no chance of succeeding, although it can still present a hurdle to JDE if there is one.
  • Given the valuations discussed and the low likelihood of a competing offer, we have no problem recommending that minority shareholders accept the offer, if it is made.

2. Is the price fair? 

2.1 We think so 

  • At SGD1.30, JDE by our estimates will be offering c.31x historical earnings, c.15x EV/EBITDA and 2.8x book for Super. Even adjusting for its net cash per share of c.11 SGD cts, JDE will still be valuing Super at 28x P/E, 13.5x EV/EBITDA and 2.5x book. 
  • In comparison, the regional historical average P/E was 26x with the highest in Malaysia, whereas the regional average EV/EBITDA was 17.5x against the highest (c.21x) in Malaysia and Vietnam.

2.2 Tough conditions for food companies now 

  • With global growth slowing, the going has been tough for food suppliers across the region. YoY revenue growth has slowed every quarter from low to mid double digits in 2014 to single digits in 2015 and YTD 2016.
  • Feedback from the channel has been that operators of supermarkets such as Sheng Siong now have the upper hand in terms of bargaining power.
  • They have been getting better prices and rebates from their suppliers, and this includes even global food companies such as Nestle.
  • A strong recent case in point was the price dispute between Tesco and Unilever when the latter tried to raise prices in the UK, blaming it on the pound’s weakness since the Brexit decision. It was resolved with Unilever appearing to have backed down after Tesco refused to accept the decision and removed Unilever’s products from its shelves.

Gregory Yap Maybank Kim Eng | 2016-11-03
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.30 Up 0.860