Super Group

Kim Eng on 24 Feb 2012


Slightly above expectations. Super’s FY11 results were slightly above expectations due to margin expansion as record raw material prices receded. Gross margins reversed their downward trend, recovering from 29% last quarter to 32.5% in 4Q. While long-term fundamentals remain promising, we do not see current valuations as an attractive entry level. This is especially so in the light of possible revenue weakness in Super’s next quarterly results.


Record profits as expected. Super achieved record revenue (up 25% YoY) and profit for the year as expected, aided largely by the ingredients sales segment which has grown exponentially over the past two years. Stripping out one-off gains in both years, recurring net profit for FY11 came in at $51.1m, which is 15% higher than last year.


4Q11 results affected by Thai flood. Despite the distribution disruptions in its biggest branded consumer market, this segment showed only a 3% YoY decline in 4Q. Management attributed this to higher sales achieved in its other markets. Nonetheless, we believe there could be a bigger adverse impact in the upcoming 1Q12 as distributors only start drawing down on stockpiled goods then.


Growth from ingredients sales. This has been an important engine of growth for Super over the past two years, although we expect growth to decelerate going forward. The capacity expansion for its non-dairy creamer plant in Wuxi was completed in 3Q11, bringing capacity to 125,000mtpa from 75,000mtpa.


Brand-building effort in 2012. This will be one of management’s focus areas for the year, as it undergoes brand-building for its main Super brand. The Owl brand has just concluded a similar effort last October. It is hoped that this will improve brand equity and pricing power compared to its main competitor Nestle. The latter is still priced at a 15-25% premium over Super, and the longer-term aim is to narrow this gap.


Maintain Hold. We raise our FY12 earnings estimates by about 4%. Our recurring net profit excludes the deferred gain of $3.1m a year from Super’s 2007 property sale (ending FY13). Our target price of $1.55 is pegged at 15x FY12F, in line with historical average.