- 3Q14 below, hit by higher input costs and unfavourable product mix.
- 4Q14 reprieve, with medium-term turnaround plan showing early promise.
- Upgrade to HOLD from SELL. SGD1.02 TP pegged to five-year mean of 15x FY15E EPS.
3Q14 net profit of SGD10m, down 47% YoY and 34% QoQ, was below market and our expectations. Gross margin fell 4.8 ppts YoY on delayed effects from more expensive palm-kernel oil, at ~9% of COGS. A 6% fall in branded consumer sales and 3% rise in lower-margin ingredient sales also compressed margins. Elevated A&P costs and a higher tax rate equally depressed earnings. 9M14 EPS forms 59% of our FY14E forecast, and we cut FY14E EPS by 18%.
Short-term reprieve
3Q14 should mark its earnings trough. We expect a better 4Q from cheaper materials. Palm-kernel oil price has fallen 40% since June while coffee has been flat. This should benefit 4Q margins. In addition, sales in three out of five core markets improved in 3Q14. This followed intensive rebranding and marketing campaigns and the effects should spill over to 4Q.
Turnaround in progress
Super will: 1) introduce more value-added products; 2) roll out sub-brands to keep market share; 3) streamline products; 4) structurally lower costs; and 5) expand in core markets such as northern Thailand and break into new ones. A turnaround will take time but early results are promising. From just adding costs as it restructures, Super can now focus on enhancing sales.
Upgrade to HOLD
The stock has reverted to its 5-year mean of 15x FY15E EPS. We upgrade to HOLD from SELL with a TP of SGD1.02, based on 15x FY15E EPS. We could turn more positive on signs of a sustained turnaround in FY15E and growth in FY16E.
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