Singapore Company Guide Version 5 Bloomberg: SUPER SP Reuters: SPGP.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 12 Aug 2016 HOLD Last Traded Price: S$0.79 (STI : 2,869.82) Price Target 12-mth: S$0.87 (11% upside) (Prev S$0.97) Potential Catalyst: Earnings recovery Where we differ: Lower on more conservative growth Analyst Alfie YEO +65 6682 3717 alfieyeo@dbs.com Andy SIM CFA +65 6682 3718 andysim@dbs.com What s New 2Q16 earnings below as sales and margins disappointed DPS of 1 Scts declared Cut FY16-17F earnings by 6-10% Maintain HOLD with lower S$0.87 TP Price Relative Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 509 487 518 556 EBITDA 89.7 87.3 88.2 92.5 Pre-tax Profit 65.4 62.7 64.2 68.9 Net Profit 47.3 47.7 48.6 52.1 Net Pft (Pre Ex.) 48.7 48.5 48.6 52.1 Net Pft Gth (Pre-ex) (%) (16.3) (0.5) 0.2 7.2 EPS (S cts) 4.24 4.27 4.35 4.67 EPS Pre Ex. (S cts) 4.37 4.35 4.35 4.67 EPS Gth Pre Ex (%) (16) 0 0 7 Diluted EPS (S cts) 4.24 4.27 4.35 4.67 Net DPS (S cts) 2.20 2.14 2.18 2.33 BV Per Share (S cts) 46.8 48.9 51.1 53.5 PE (X) 18.5 18.4 18.0 16.8 PE Pre Ex. (X) 18.0 18.1 18.0 16.8 P/Cash Flow (X) 12.4 10.2 14.0 13.7 EV/EBITDA (X) 8.5 8.2 7.8 7.1 Net Div Yield (%) 2.8 2.7 2.8 3.0 P/Book Value (X) 1.7 1.6 1.5 1.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 9.3 8.9 8.7 8.9 Earnings Rev (%): (6) (10) - Consensus EPS (S cts): 4.50 5.00 5.40 Other Broker Recs: B: 1 S: 1 H: 7 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P More muted growth outlook Maintain HOLD, lower TP to S$0.87. We maintain our neutral stance on (SUPER). 2Q16 earnings disappointed our earnings forecasts both in terms of sales and margins. Our TP is reduced to S$0.87 based on 20x FY17F earnings as we trimmed our earnings estimates. While we believe SUPER is on a recovery mode, we expect the pace of recovery to be modest. We see growth driven by new product launches and higher margin products, but weak regional consumer sentiment could dampen prospects. Trading at 18.0x FY17F PE, representing -1SD of its 4-year mean, valuations are reflective of muted earnings momentum ahead. Hence, we maintain our neutral stance on the stock for now. Disappointing 2Q16 earnings, muted outlook. 2Q16 earnings was 5% lower y-o-y at S$10m on the back of an 8% drop in revenue to S$115m, dragged by weaker sales to Myanmar for Branded Consumer and weak sales to Indonesia and Philippines for the Ingredients segment. There was also higher opex incurred on higher A&P and staff costs, hence EBIT margins were lower despite higher gross margins. As weak regional consumer sentiment continues to dampen growth outlook, we have lowered our FY16-17F earnings estimates as benefits from new higher margin products and operational efficiencies will be challenged by a weak sales outlook. Valuation: Pegged to 20x PE. We lower our target price to S$0.87, based on 20x price earnings multiple on FY17F earnings, as we cut FY17F earnings by 10%. Upside is capped even after factoring FY17F s growth prospects. Key Risks to Our View: Surge in commodity prices. We expect SUPER to enjoy the benefits of lower coffee bean prices of c.us$1,500/mt to US$1,700/mt compared to an average of US$2,000 in 2014. This should aid margins going forward. Poor weather could impede our positive margin outlook and derail our earnings estimates for the stock. At A Glance Issued Capital (m shrs) 1,114 Mkt. Cap (S$m/US$m) 875 / 651 Major Shareholders (%) Lay Hoon Te 12.2 Kee Bock Teo 11.8 YHS Invest Pte Ltd 11.7 Free Float (%) 38.5 3m Avg. Daily Val (US$m) 0.72 ICB Industry : Consumer Goods / Food Producers ed: JS / sa:jc, PY
WHAT S NEW 2Q16 results review 2Q16 below expectations. Earnings came in at S$10m (-5%, y-o-y) on the back of revenue of S$115m (-8%). Branded Consumer sales declined 6% y-o-y to S$75m while Food Ingredients fell by 12% to S$40m. Operating margins declined to 10.8% from 12.7% on higher opex, even though gross margins expanded. These factors led to earnings falling behind our expectations of S$12.5m. SUPER declared an interim dividend of 1 Sct, in line with our expectation. Ingredients dragged by Indonesia and Philippines. Ingredient sales declined 12%, largely led by slower soluble coffee powder and non-dairy creamer sales in South East Asia, particularly in Indonesia and Philippines. Philippines had also experienced lower sales in 1Q16. Branded consumer sales affected slower Myanmar sales. Coffee and cereal products in South East Asia were the key drags on Branded Consumer sales. Myanmar in particular saw slower sales as there was reduction in selling prices to its distributors by 20% to help them mitigate the effects of a weaker Kyat. SUPER s Myanmar distributor purchases SUPER s products in US dollars while selling them in Myanmar in local currency (Kyat). On constant currency terms, Branded Consumer sales declined by 3%. This is despite stronger sales in Thailand (partly contributed by the launch of ESSENSO Microground coffee in May 2016), Singapore, China, Malaysia and Philippines. Higher opex despite gross margin expansion. Gross margins was 37.3% (+1.8 ppts) on better sales mix of higher margin products. On a sequential basis, gross margins were relatively stable. EBIT margin was lower at 10.8% (-1.9 ppts). This was largely due to higher expenses which included staff severance payouts, consolidation of non-dairy creamer facilities from Singapore to China, and higher A&P expenses. Muted outlook. This quarter s results were dragged by weaker sales to Myanmar for Branded Consumer and weak sales to Indonesia and Philippines for the Ingredients segment. The lower pricing in Myanmar especially the price reduction to its distributor had a major impact on the results. Otherwise sales volumes to Myanmar were stable with improved sales to other Branded Consumer markets. Regional consumer sentiment remains weak and we believe this could be a key challenge to earnings outlook going forward. Nonetheless, SUPER is trying to improve margins by introducing higher margin products such as ESSENSO Microground coffee and keeping a leaner cost structure by moving production of its non-dairy creamer plant from Singapore to China. Lower earnings by 6-10%. We lower our FY16-17F earnings to account for lower than expected 1H16 and slower growth outlook. The weak consumer sentiment will keep demand and sales muted. Our revenue growth for FY17F is reduced from 8% to 6%; the revenue decline in 1H16 may lead to revenue underperforming for the whole year. We have also imputed a higher operating cost structure to reflect the relocation of the non-dairy creamer plant to China and more intense marketing activities, offset by slightly better gross margins for sales of higher margin products. Maintain HOLD, TP reduced to S$0.87. We maintain our HOLD recommendation in view of a muted outlook. In line with reducing our earnings estimates for FY17F, we have lowered our TP to S$0.87, based on 20x FY17F earnings. Page 2
Quarterly / Interim Income Statement (S$m) FY Dec 2Q2015 1Q2016 2Q2016 % chg yoy % chg qoq Revenue 126 119 115 (8.4) (3.7) Cost of Goods Sold (81.0) (74.7) (72.1) (11.0) (3.5) Gross Profit 44.6 44.8 43.0 (3.6) (4.1) Other Oper. (Exp)/Inc (28.7) (28.1) (30.6) 6.5 8.8 Operating Profit 15.9 16.7 12.4 (22.0) (25.7) Other Non Opg (Exp)/Inc (1.1) (0.7) 0.25 nm nm Associates & JV Inc 0.01 0.0 0.13 nm nm Net Interest (Exp)/Inc 0.92 0.0 0.39 (57.6) nm Exceptional Gain/(Loss) (0.3) (0.8) 0.0 (98.1) (99.4) Pre-tax Profit 15.4 15.1 13.2 (14.6) (13.0) Tax (4.3) (3.7) (3.3) (24.9) (11.2) Minority Interest (0.6) 0.12 0.08 nm (27.0) Net Profit 10.5 11.6 9.98 (5.0) (13.7) Net profit bef Except. 10.8 12.4 9.99 (7.3) (19.3) EBITDA 20.9 22.5 19.3 (7.6) (14.2) Margins (%) Gross Margins 35.5 37.5 37.3 Opg Profit Margins 12.7 14.0 10.8 Net Profit Margins 8.4 9.7 8.7 Source of all data: Company, DBS Bank Page 3
CRITICAL DATA POINTS TO WATCH Consumer goods Earnings Drivers: Twin engines of growth. Top-line growth is driven by two business segments, Branded Consumer and Food Ingredients, in key markets across Singapore, Malaysia, Myanmar, Thailand, Philippines, Indonesia, China and Taiwan. Branded Consumer is a major contributor to overall sales at 65%, predominantly from ASEAN. Key markets are Thailand and Myanmar, each contributing 20% or more to the segment, followed by Malaysia at c.15%. The remaining 35% of revenue is contributed by Food Ingredients derived mainly from North Asia. Gross margins for Branded Consumer goods range from 40-45% while Food Ingredients' range from 25-30%. Ingredients Top-line growth driven by new products, penetration, new markets. Revenue growth will continue to be supported by new products being rolled out. SUPER will be launching some other new products in addition to the Nutremill range introduced in 4Q14. Other products include instant tea mixes and instant health drinks. More premium products will also be introduced in the Food Ingredients segment in the form of Nutritional oil powders and Botanical herbal extracts. There is more room to penetrate north Malaysia with its existing products, and new products in Thailand and Myanmar. From 4Q15, Super had launched ESSENSO premium 3-in-1 coffee that uses premium Arabica coffee beans as opposed to the standard Robusta beans. It is now available in markets including Singapore and Thailand. Total Robusta coffee is a key driver of margins. Soft commodities account for 75% of cost of goods sold (COGS). For SUPER, gross margins are largely affected by direct costs rather than selling prices. The single largest input to its direct cost is Robusta coffee beans. We estimate that COGS comprises 30% Robusta coffee, 15% sugar, 15% palm oil, 15% other nondairy creamer components, 10% packaging materials and 15% other miscellaneous direct costs. The correlation between higher robusta bean prices and lower gross margins (on a 6-month lag) is relatively strong at 0.7. Estimated COGS breakdown Expect commodity prices to remain manageable. Prices of key raw material inputs, i.e. Robusta coffee beans, palm kernel oil, and sugar have traded favourably. Sugar and palm oil prices have been at their lows since 2009. Recent coffee prices may have bottomed in 1Q16, but we do not see a sharp increase in prices in the interim. Besides, Robusta coffee prices remain favourable, having corrected by c.30% from US$2,200/ton since 1H 2014. Based on internal hedging policies, SUPER would have locked in prices for the next 3-6 months. However, negative weather effects may cause input prices to spike, resulting in margin compression. (%) 39.0 38.0 37.0 36.0 35.0 34.0 33.0 Coffee price vs Gross margins Gross margins Annual avg robusta price (reverse scale) US$/ton 1,600 1,700 1,800 1,900 2,000 2,100 32.0 31.0 2,200 30.0 2,300 29.0 2,400 FY10 FY11 FY12 FY13 FY14 FY15 Source: Company, DBS Bank Page 4
Balance Sheet: Share price is backed by net cash of 10.4 Scts per share; will acquire companies if interesting targets arise at the right price. SUPER has net cash of S$116m on its balance sheet, amounting to 10.4 Scts per share. It is in a good position to acquire companies rather than to be acquired. The company is well controlled by founding families and their concert parties, at about 63%. Furthermore, the second generation of family members has taken up key executive positions. The company has historically paid out more than 50% of earnings as dividends to shareholders. Leverage & Asset Turnover (x) Capital Expenditure Share Price Drivers: Robusta coffee prices. Correlation between quarterly share price and quarterly gross margins is strong at 0.8 based on our study on data from 1Q13 to 1Q15. Gross margin is in turn driven largely by Robusta coffee bean prices (c.30% of COGS), currently trading at their lows since 4Q14 (c.us$1,800/ton). Lower Robusta bean and commodity prices will lend support to the share price, provided there is no supply or weather shocks. Sustained recovery in earnings. Recent quarters have seen earnings declining on weak regional demand, regional currency weakness, internal rebranding, re-strategising and product restructuring. As a result, valuation has de-rated to the high teens. We believe a sustained earnings recovery from its strategy of rolling out new products will help to re-rate the stock. Key Risks: Commodity price increase. Increase in commodity prices, especially for Robusta coffee beans, will reduce margins. For now, El Nino is a threat. A slowdown in coffee consumption or income regionally could potentially affect revenue growth. Lastly, instant coffee competition is keen with many global and regional brands in the market. Heavy promotions by new or existing instant coffee brands can affect sales and market share. Company Background Ltd (SUPER) is a manufacturer, distributor and brand-owner of instant beverages and convenience food products. The Branded Consumer segment manufactures and distributes instant coffee, instant cereals and instant tea mix products in Thailand, Myanmar, Malaysia, Singapore, Philippines and China. The Food Ingredients segment produces instant soluble coffee powder, cereal flakes, creamers, Botanical Herbal Extracts and Nutritional Oil Powders for food manufacturing customers in ASEAN and North Asia. ROE (%) Forward PE Band (x) PB Band (x) Source: Company, DBS Bank Page 5
Key Assumptions FY Dec 2014A 2015A 2016F 2017F 2018F Consumer goods 351 335 335 355 380 Ingredients 188 170 152 162 175 Total 539 505 487 518 556 Segmental Breakdown FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Singapore 111 97.3 97.4 104 111 South East Asia 315 306 283 300 322 East Asia 113 106 107 114 122 Total 539 509 487 518 556 Operating profit (S$m) Singapore 50.6 56.3 44.5 47.3 50.8 South East Asia 55.3 44.0 49.4 52.6 56.4 East Asia 18.7 16.8 17.7 18.8 20.2 Elimination (54.5) (50.5) (49.1) (55.9) (60.3) Total 70.2 66.6 62.5 62.8 67.1 Operating profit Margins Singapore 45.7 57.9 45.7 45.7 45.7 South East Asia 17.5 14.4 17.5 17.5 17.5 East Asia 16.5 15.9 16.5 16.5 16.5 Total 13.0 13.1 12.8 12.1 12.1 Income Statement (S$m) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 539 509 487 518 556 Cost of Goods Sold (350) (327) (305) (329) (353) Gross Profit 190 182 182 189 203 Other Opng (Exp)/Inc (120) (116) (119) (126) (136) Operating Profit 70.0 66.6 62.5 62.8 67.1 Other Non Opg (Exp)/Inc 1.19 (1.1) (0.5) 0.0 0.0 Associates & JV Inc (0.6) (0.7) 0.36 0.50 0.50 Net Interest (Exp)/Inc 0.18 1.95 1.13 0.98 1.26 Exceptional Gain/(Loss) 10.6 (1.4) (0.8) 0.0 0.0 Pre-tax Profit 81.4 65.4 62.7 64.2 68.9 Tax (9.8) (16.4) (15.5) (16.1) (17.2) Minority Interest (2.8) (1.7) 0.37 0.38 0.40 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 68.8 47.3 47.7 48.6 52.1 Net Profit before Except. 58.2 48.7 48.5 48.6 52.1 EBITDA 87.6 89.7 87.3 88.2 92.5 Growth Revenue Gth (%) (3.2) (5.6) (4.4) 6.3 7.3 EBITDA Gth (%) (18.2) 2.4 (2.7) 1.0 4.9 Opg Profit Gth (%) (28.7) (4.8) (6.2) 0.4 6.9 Net Profit Gth (Pre-ex) (%) (28.3) (16.3) (0.5) 0.2 7.2 Margins & Ratio Gross Margins (%) 35.1 35.8 37.3 36.5 36.5 Opg Profit Margin (%) 13.0 13.1 12.8 12.1 12.1 Net Profit Margin (%) 12.7 9.3 9.8 9.4 9.4 ROAE (%) 14.3 9.3 8.9 8.7 8.9 ROA (%) 11.2 7.3 7.1 7.0 7.1 ROCE (%) 12.1 9.3 8.5 8.1 8.3 Div Payout Ratio (%) 50.3 51.9 50.0 50.0 50.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Bank Page 6
Quarterly / Interim Income Statement (S$m) FY Dec 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Revenue 126 121 141 119 115 Cost of Goods Sold (81.0) (81.5) (86.6) (74.7) (72.1) Gross Profit 44.6 39.5 54.5 44.8 43.0 Other Oper. (Exp)/Inc (28.7) (29.0) (31.4) (28.1) (30.6) Operating Profit 15.9 10.5 23.1 16.7 12.4 Other Non Opg (Exp)/Inc (1.1) (0.6) (0.9) (0.7) 0.25 Associates & JV Inc 0.01 0.0 (0.5) 0.0 0.13 Net Interest (Exp)/Inc 0.92 0.59 0.36 0.0 0.39 Exceptional Gain/(Loss) (0.3) (0.4) (0.4) (0.8) 0.0 Pre-tax Profit 15.4 10.0 21.6 15.1 13.2 Tax (4.3) (2.9) (5.4) (3.7) (3.3) Minority Interest (0.6) 0.27 (0.5) 0.12 0.08 Net Profit 10.5 7.42 15.7 11.6 9.98 Net profit bef Except. 10.8 7.83 16.1 12.4 9.99 EBITDA 20.9 16.1 28.0 22.5 19.3 Growth Revenue Gth (%) 3.2 (3.6) 16.6 (15.3) (3.7) EBITDA Gth (%) (15.8) (22.7) 73.8 (19.8) (14.2) Opg Profit Gth (%) (7.6) (34.0) 120.4 (27.7) (25.7) Net Profit Gth (Pre-ex) (%) (22.9) (27.3) 106.1 (23.3) (19.3) Margins Gross Margins (%) 35.5 32.6 38.6 37.5 37.3 Opg Profit Margins (%) 12.7 8.7 16.4 14.0 10.8 Net Profit Margins (%) 8.4 6.1 11.1 9.7 8.7 Balance Sheet (S$m) FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 276 274 264 249 234 Invts in Associates & JVs 7.57 10.9 11.3 11.8 12.3 Other LT Assets 3.35 3.35 3.35 3.35 3.35 Cash & ST Invts 104 127 174 202 230 Inventory 115 106 102 111 120 Debtors 118 141 124 132 141 Other Current Assets 6.49 3.41 3.41 3.41 3.41 Total Assets 631 665 682 712 744 ST Debt 0.02 0.03 0.03 0.03 0.03 Creditor 79.5 80.5 73.8 79.9 86.3 Other Current Liab 27.8 39.1 39.1 39.1 39.1 LT Debt 0.0 0.03 0.03 0.03 0.03 Other LT Liabilities 6.79 7.34 7.34 7.34 7.34 Shareholder s Equity 498 522 546 570 596 Minority Interests 19.5 16.5 16.1 15.8 15.4 Total Cap. & Liab. 631 665 682 712 744 Non-Cash Wkg. Capital 132 131 117 127 139 Net Cash/(Debt) 104 127 174 202 230 Debtors Turn (avg days) 72.0 92.8 99.2 90.1 89.7 Creditors Turn (avg days) 63.8 96.7 100.4 92.3 92.5 Inventory Turn (avg days) 118.8 133.8 135.7 127.9 128.1 Asset Turnover (x) 0.9 0.8 0.7 0.7 0.8 Current Ratio (x) 3.2 3.2 3.6 3.8 3.9 Quick Ratio (x) 2.1 2.2 2.6 2.8 3.0 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) NM NM NM NM NM Z-Score (X) 7.2 6.5 6.4 6.3 6.3 Source: Company, DBS Bank Page 7
Cash Flow Statement (S$m) FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 81.4 65.4 62.7 64.2 68.9 Dep. & Amort. 17.0 24.9 24.9 24.9 24.9 Tax Paid (9.8) (16.4) (15.5) (16.1) (17.2) Assoc. & JV Inc/(loss) 0.57 0.67 (0.4) (0.5) (0.5) Chg in Wkg.Cap. (18.9) (5.1) 14.3 (10.2) (12.1) Other Operating CF (8.3) 0.90 0.0 0.0 0.0 Net Operating CF 62.0 70.4 86.1 62.4 64.0 Capital Exp.(net) (30.2) (17.2) (15.0) (10.0) (10.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 2.89 1.25 0.0 0.0 0.0 Div from Assoc & JV 0.08 0.02 0.0 0.0 0.0 Other Investing CF (0.3) 0.02 0.0 0.0 0.0 Net Investing CF (27.5) (15.9) (15.0) (10.0) (10.0) Div Paid (50.2) (34.6) (23.8) (24.3) (26.0) Chg in Gross Debt 19.6 7.00 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (3.1) (5.3) 0.0 0.0 0.0 Net Financing CF (33.8) (32.9) (23.8) (24.3) (26.0) Currency Adjustments 2.05 1.02 0.0 0.0 0.0 Chg in Cash 2.83 22.6 47.3 28.1 28.0 Opg CFPS (S cts) 7.26 6.77 6.44 6.51 6.82 Free CFPS (S cts) 2.86 4.77 6.38 4.70 4.84 Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Alfie YEO Andy SIM CFA Page 8
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 12 Aug 2016 16:45:26 Dissemination Date: 12 Aug 2016 17:32:31 GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. 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