Super Group

CIMB Research, March 12

IF 2013 was a year of rebranding (for coffee) and market diversification (for non-dairy creamer), we see 2014 as a year for its new coffee markets to step up, its mainstay coffee markets to stabilise and its NDC (non-dairy creamer) to product differentiate - these are its potential price catalysts.

We keep our EPS forecasts and target price (still based on 23.5 times CY2015 PE, in line with Nestle Malaysia). As recent price weakness opens up room for a more positive view, we upgrade our rating from "hold" to "add" (target price: S$4.20).

Super has a mix of mature markets and new growth markets. The diversity helps to even out the impact of challenges in each market at any point in time. In the consumer division, the Philippines (its sixth largest market) and Myanmar (second largest) are the relatively more challenging markets right now, while China (fifth largest), Thailand (largest) and Malaysia (third largest) look more promising.

Each market requires a slightly different strategy to cater to the local tastes and competitive pressures. Market conditions will also vary but the group's brand legacy and distributor links will ensure that it will have a place among the leaders in 3-in-1 coffee. We explore the issues of each specific market.

In its food ingredients business, competition from large Chinese players has pushed Super Group to adopt strategic initiatives such as increasing its cost efficiency, and product value-add and differentiation. Meanwhile, even as it steps up the execution of these strategies, the booming NDC sales in South-east Asia help to offset this competitive concern.

The main investor concern seems to be whether the rising raw material prices will impinge on margins. According to management, this is not a major worry for now as:

1) raw material prices are nowhere near their 2011 levels,

2) its average selling prices have been raised to compensate for the cost increase in the past and the price hikes remained,

3) it now has greater economies of scale, and

4) it has done some stock- keeping unit rationalisation.

All in, management believes it can cope with the increased costs and maintain margins.

ADD