Excerpts from analysts' report
HSBC Global Research analysts: Permada Darmono & Erwan Rambourg
 Thousands of bags of coffee beans in Super's warehouse in Johor where it has a instant coffee production plant. NextInsight file photo.Hold: Market’s concerns are not unfounded » Super Group stock is down c28% y-t-d but we think it will not re-rate anytime soon » 1H15 results with revenue and NPAT down 4% and 27% y-o-y, respectively, show there is more work to do » Reiterate Hold rating and cut TP to SGD0.95 from SGD1.36 |
Super Group stock correction partly deserved: Year-to-date, Super Group’s stock has corrected by c28% which we believe is due to weak operating performance since last year. For the past six quarters, Super Group has shown flat or declining y-o-y revenue trend.
We think this reflects a broader trend of losses in market share in Super Group’s product categories as well as intense price war from some of its major competitors such as Nestle, Mayora Indah and Universal Robina (in instant coffee). In its disclosures, the company attributed declines in sales and profits largely due to weak FX in Southeast Asian markets as well as the discontinuation of non-performing products. While these are valid reasons, we think market share losses and product fatigue are the main reasons for the company’s underperformance.
1H15 performance supports our view: In 1H15, Super Group reported revenue decline of 4% y-o-y (-5% in 2Q15) driven by sales declines in both its Branded Consumer (BC) and Food Ingredients (FI) segments. These were in line with our and Thomson Reuters consensus forecasts.
 "We reduce the company’s top-line growth assumption to around 2% pa beyond 2017e (from a 2017-24e CAGR of 7.1% previously) in our DCF to reflect the uncertainty in the company’s turnaround efforts, which we think can last a few years. This lowers our DCF-based TP to SGD0.95." -- Permada Darmono (photo) & Erwan Rambourg |
Meanwhile, gross margin was compressed by around 70bp in 1H15 to 35.8% from 36.5% in 1H14.
Combined with higher opex-to-sales ratio, EBIT margin contracted by 160bp to 13.3% in 1H15 from 14.9% in 1H14. Inclusive of a higher tax rate of 24.0% in 1H15 (vs. 11.0% in 1H14) due to dividend payment out of its Chinese operation and the expiry of its overseas tax incentive, NPAT declined by 27% y-o-y in 1H15, 13% and 24% behind HSBC and consensus estimates. We believe the continued decline in the company’s top line reflects ongoing market share losses and intense competition.
Reiterate Hold rating and cut TP to SGD0.95 from SGD1.36: We cut our 2015e NPAT by 9% to reflect the higher effective tax rate the company is paying and reduce our 2016e and 2017e NPAT by 2% and 5%, respectively, through lower margin assumptions.
More pertinently, we reduce the company’s top-line growth assumption to around 2% pa beyond 2017e (from a 2017-24e CAGR of 7.1% previously) in our DCF to reflect the uncertainty in the company’s turnaround efforts, which we think can last a few years. This lowers our DCF-based TP to SGD0.95.
