Super Group - Hold: Elusive near-term turnaround

■ 3Q2015 results saw no recovery, prospect of a near-term turnaround appears elusive

■ Unfavourable SEA FX issue persists

■ Reduce 2016/17 net income forecasts on higher depreciation, tax rate; increase working capital requirement; TP unchanged at SGD0.95

Top-line shrinkage persists
3Q2015 marked the seventh out of eight recent quarters of negative top-line growth. Super Group’s “premiumisation” thrust in its Food Ingredients (FI) business has hitherto not made any significant impact. Besides unfavourable FX movement in SE Asia, higher depreciation expense as a result of facilities completion and the expiry of tax incentives brought about lower net earnings. Super Group’s stock price has corrected c44% since its March 2015 high. We previously pointed out that Super Group has been losing market share in its Singapore and Malaysian market and continue to believe that product fatigue is the reason behind Super Group’s underperformance. The prospect of a near-term turnaround thus appears elusive.

3Q2015 results saw no recovery
Revenue shrank by 6.6% y-o-y in 3Q2015 (9M2015: -1.7% y-o-y) driven by 11.4% yo-y drop in Food Ingredients sales (9M2015: -9.1% y-o-y). 9M2015 revenue made up 70.3% and 69.8% of HSBC and Thomson Reuters consensus revenue estimates, respectively. Gross margin improved by 0.3% y-o-y in 3Q2015 to 32.6% due to lower input materials cost. Depreciation expense jumped by 17.2% y-o-y in 3Q2015 (9M2015: +44.3% y-o-y) as a result of the completion of expansion projects. As a result of higher opex and negative operating leverage, EBIT margin narrowed by 1.0% y-o-y to 8.7% in 3Q2015 (9M2015: -1.3% y-o-y to 11.8%). Effective tax rate in 3Q2015 was significantly higher at 28.5% in 3Q2015 (9M2015: 25.0%) due to the expiry of tax incentives in overseas subsidiary. Net earnings in 3Q2015 were 25.6% lower at SGD7.4 million (9M2015: -26.4%). 9M2015 net earnings made up 65.1% and 62.3% of HSBC and Thomson Reuters consensus net earnings estimates, respectively. 3Q2015 cash conversion cycle increased to 147 days (3Q2014: 108).

Technical Analysis
Daily Chart
Maintain Hold rating and TP at SGD0.95
We reduce our net income forecast on the back of higher depreciation and effective tax rate and increase our working capital forecast on the back of rising cash conversion cycle. The combinations of higher depreciation add-back and higher net working capital result in approximately the same amount of total free cash flow forecast in our DCF. We thus maintain our DCF-based TP at SGD0.95. (Read Report)

Source : HSBC Global Research

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