Super Group

DBS Group Research on 1 Oct 2012

WE turn positive on Super on a weaker raw material price outlook. Our two-year compounded annual growth rate growth is now 17 per cent instead of 13 per cent. Sugar and palm oil prices have recently corrected as a result of higher stockpiles, inventory and supplies. As a result, we expect earnings and margin improvement for FY2013/ FY2014.

Sugar and palm oil have recently corrected as a result of higher stockpiles, inventory and supplies. We expect management to accumulate more raw materials at current levels. Our gross margin assumption for FY2013/FY2014 is hence 36 per cent/35 per cent. With management poised to stock up more inventory going forward, this should trickle into margin expansion and cost benefits over FY2013. Our gross margin assumption for FY2013 is in line with input prices at levels similar to Q4 2010 and Q1 2011. We are raising our earnings estimates for FY2013 and FY2014 by 13 per cent and 7 per cent on a lower raw material price outlook.

We find Super's valuation attractive at 14 times PE and a PEG of 0.8 times post earnings revision. Given that its net margins and growth outlook is more positive than its peers, we ascribe a 17 times forward PE with a target price of S$2.56 to the stock to reflect its more positive growth outlook. Upgrade to "buy".
BUY