■ El Nino could jack up prices of coffee, palm kernel oil & sugar. Estimate respective GP impact of 3.8%, 2.5% & 1.2%.
■ New products in 2H15 & inventory stocking now should moderate impact. No change to EPS.
■ Maintain BUY & SGD1.57 TP, at 1SD above 5-year 16x P/E mean. Expect catalysts from potentially stronger 2H15.
Our commodities analyst warns that El Nino conditions are gaining strength this year. He expects most soft commodities to be hit, including coffee, CPO and sugar.
All else being equal, we estimate that Super’s FY16 gross profit could be affected by 3.8%, 2.5% and 1.2% from 10% higher prices for Robusta coffee, hydrogenated palm kernel oil (HPKO) and sugar respectively. Coffee is its biggest input, accounting for 30% of the cost of each coffee sachet. This is followed by 10% for HPKO. Prices could rise once El Nino’s severity this year has been confirmed and the impact on next year’s supply is clearer. Coffee prices, however, should be capped by bean hoarding by farmers. The hoarding should help offset a potentially smaller crop.
Super’s recovery this year is shaping up as we expected. 1Q was weak; we expect the same for 2Q due to currency and growth challenges in Malaysia and Myanmar. The two countries account for 9% and 14% of group sales respectively. But come 2H15, Super plans to launch higher-margin products in its key markets that we believe will moderate the impact. It is also stocking up more raw materials during current low prices. This is expected to buffer margins for at least 2-3 quarters.
What’s Our View
Although a post-GST consumer slowdown and MYR weakness in Malaysia and kyat depreciation in Myanmar are challenges, we think that Super has a better chance of restarting growth this year than it did in 2013-14. Maintain BUY with a TP of SGD1.57 or 1SD above its 5-year historical mean P/E of 16x. (Read Report)
Source : Maybank Kim Research