- 2Q14 below. Coverage transferred. Cut from HOLD to SELL with de-rating catalysts from rising selling & distribution costs, higher tax rate and currency weakness.
- New SGD1.18 TP, at 15x FY15E P/E, its 5-year mean.
- EPS cut by 14-17% as Super struggles with growth in core markets.
2Q14 revenue fell 5% YoY. Reported PATMI plunged 59% YoY to SGD15m. Even after adjusting for a SGD17m gain from the sale of an associate company in 2Q13, net profit fell 27% YoY. 1H14 PATMI of SGD32.8m comprised just 40% of the market’s FY14E forecast and 37.3% of our former forecast.
Hiccups in core markets; cut to SELL
We cut FY14E-16E EPS by 14-17%. With several headwinds anticipated, downgrade to SELL with a new TP of SGD1.18 from SGD1.50. This is based on 15x FY15E EPS (previously 20x FY14E), its 5-year mean, after our transfer of coverage. Super is struggling to regain momentum in two of its four core markets, Myanmar and Malaysia. Operations in the Philippines arestagnating. It is working to get growth back but its efforts may not bear fruits until early FY15E, at the earliest.
Meanwhile, costs may rise on marketing intensity in Thailand (expanding distribution into North and Central Thailand) andMyanmar (more promotions needed) to defend market share. It also needs to spend more in its new markets of China (4% of sales) and the Philippines (6%). Selling costs to rise from 12% of sales to 15% by year-end. Baht and kyat weakness may also worsen while its tax rate is set to rise from 10% to 12-15% after the expiry of its Malaysia pioneer status. That said, gross margins may get a slight reprieve in 2H14 from falling sugar, CPO and robusta coffee prices.
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