Super Group - Making inroads into the premium coffee segment

What’s new
Super Group announced on 18 Jun (after market hours) that a subsidiary of its wholly owned Owl International, Owl Beverage Specialist (OBS), has been appointed as the sole distributor for Caffè Cagliari products in Asia. In addition to distributing its full range of products (whole beans, ground coffee, capsule coffee (including Nespresso compatible capsules) and machines, as well as complementary products like coffee sweets), OBS will introduce the first Cagliari Café franchise in Singapore.

Highlights
Partnership details. Caffè Cagliari is an Italian family owned company with a presence across Europe (UK, Sweden, Hungary, Bulgaria), as well as recently in the US and Canadian markets. It said that it intends to make Singapore its regional distribution hub.

Prior to the partnership, the company had roughly 200 customers in Singapore. It will focus on bringing its products into hotels, restaurants and cafes first, while retail products could be launched by end-2015, according to the company.

Further details regarding the partnership were not disclosed, although we expect that Super could possibly undertake the majority of distribution and marketing costs associated with Caffè Cagliari’s products. It remains unclear at this point which other markets Super is targeting to distribute these products, as well as pricing strategy for the products and potential revenue contribution from the partnership.

‘Premiumisation’ focus. Management had previously mentioned that it intends to launch new products in 2H15, and that the new products are likely to focus on the ‘premiumisation’ of its existing product scope. While it may be premature to surmise whether the partnership could result in cannibalisation of sales from these new product launches, Caffè Cagliari appears to target mainly the high-end coffee segment, a segment previously not served by Super’s existing instant coffee product range, indicating to us that Super’s new product launches are unlikely to be in the same product category.


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What we recommend
While the partnership appears promising, as it provides Super inroads into the premium coffee segment, it is unlikely to have a significant impact to our forecasts in the near-term. Further, it remains unclear how the company plans to allocate resources toward the partnership, and whether this could detract from the company’s efforts to turnaround the performance of its branded consumer (BC) segment in the near-term (1Q15 BC sales declined 4.9% YoY).

Super Group is trading at a 2015E PER of 19.7x, which appears unattractive given its relatively modest earnings-growth profile (2014-17E net profit CAGR of 7.1% vs 27.4% over 2008-13). We have a PER-based 12-month target price of SGD1.06 and an Underperform (4) rating on the stock. A decline in competitive intensity in its core markets represents a key risk to our view. (Read Report)

Source : Daiwa Capital Markets

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