Despite its 17% drop in share price since 12 May-15, we think it is still too early to change our bearish view. We understand that the group is executing its strategic initiatives of focusing on branding, product innovation and diversification to position for the long term.
While its initiatives are commendable, the big negative that outweighs them now is weak ASEAN consumption trends across several markets and rising coffee competition as industry growth slows. We keep our Reduce rating and target price (17x CY16 P/E, 5-yr mean). The stock could be further de-rated by weak BC sales in core markets or weak FI sales to SE Asia.
Brand focus for consumer
Super Group is focused on executing its strategic initiatives of branding, product innovation and geographical diversification, to cope with the challenges in weak consumption markets.
We believe that these moves are incremental moves. The bigger positive catalyst for the stock remains the eventual recovery of the Thai market or development of China into a more substantial market. Super is coping in Thailand and Myanmar but these are no longer growing at double-digits. It is doing well in China but that is still small. All other markets seem a bit of a struggle now.
The food ingredients (FI) business is about non-dairy creamers. Challenges to keep up FI sales in East Asia (2014) have seen it successfully pivot to SE Asia. The long-term concern must be when the Chinese competitors come into SE Asia as well. To build up a gap with the future Chinese rivals, FI initiatives are designed to move up towards less commoditised variants of instant coffee ingredients and to achieve cost efficiencies by building its own raw feed capacity. We see FI doing well in 2015, compensating for a weak BC performance.
Achieving topline growth is the challenge
The main challenge is that ASEAN consumption growth is slowing. Without topline growth, the positive effects of low commodity prices on margins look muted, net profit growth is tough to achieve and valuations still look too rich for no profit growth. (Read Report)
Source : CIMB Research