First-ever Owl Café at The Star Vista

Singapore’s famous Owl coffee brand will open its first-ever cafe called “Owl Café” at The Star Vista. The mall is slated to open beside the Buona Vista MRT station in September 2012. It is owned and managed by CapitaMalls Asia.

“A familiar and well-loved brand of award-winning coffee, Owl will open its first-ever Owl Café at The Star Vista. The café will offer various blends of authentic Straits Asian-inspired coffee with Straits Asian food and desserts.” – from CapitaMalls Asia Media Release on 21st March 2012.

Owl is owned by Super Group. In my previous post on Super (under the “Future Growth” heading), it was stated that Super was looking to open a cafe. The Management of Super has put money where its mouth is and has forayed into a physical store. This clearly shows that the Management of Super delivers on what it promises. If the Owl Café really takes off and proves to be extremely profitable, I’m sure there will be more cafes by Super springing up in other locations. And if I’m not wrong, this is the first local coffee brand that is opening a cafe. All the best, Super!

Liquidated Super Group

I sold off my stakes in Super Group last week due to the following two reasons:

1. Stock has become too overvalued according to my calculations
2. Wanted to liquidate and keep some cash amid all the economic uncertainties

The main reason why I liquidated was to have some cash in hand to buy up companies when Mr. Market throws a huge tantrum. Super Group has been hovering in the ‘overvalued’ region for some time but I didn’t sell until recently. I would have not liquidated, if not for the opportunities that may be presented in the short-term due to any market corrections.

Super Group FY2010 Analysis

Super Group, Southeast Asian leading brand-owner of instant beverages and convenience foods, announced a 46.7% jump in net profit to S$59.3 million for FY2010. The revenue for 2010 was at $351.8 million (2009: $296.3 million).

Ingredients sales, particularly non-dairy creamer in the China market, surged 86.8% to S$58.2 million in FY10 from S$31.2 million in FY09. Super was able to leverage on this demand after completion of its new non-dairy creamer production line in its existing Wuxi plant in China during 3Q10. This expanded the Group’s annual production capacity from 50,000 metric tons to 75,000 metric tons.

Gross profit margins and net profit margins are at 37.35% and 16.86% respectively. These are significant improvements over the previous couple of years (as seen from table above). The margin improvements were largely achieved through lower production costs and the sales of higher margin products.

Looking at the balance sheet, cash balances doubled to $141.8 million (2009: $70.5 million) with zero debt. ROE is at 17.4% and is the best amongst all the years. ROA dipped for FY2010 and is at 13.3% (2009: 14.5%).

Looking at cash flow, cash flow from operations is at $55.4 million (2009: $66.4 million). The drop over the previous year was due to increase in inventories mainly due to higher levels of raw materials held by certain subsidiary companies to meet anticipated production requirements and increase in trade receivables which is consistent with the higher sales revenue achieved during the current year. I will be keeping a close eye on the inventory levels and trade receivables for FY2011.

Capex increased to $14.6 million and this was mainly due to completion of its new non-dairy creamer production line in its existing Wuxi plant in China in 3Q10. Average free cash flow stands at $43 million.

Outlook by Super from its press release: “The Group expects market conditions to remain competitive in the next twelve months while currency fluctuations and rising raw material costs, such as coffee bean and sugar price, will impact the Group’s operating performance. However, management is familiar with these challenges and will continue to take appropriate actions in managing their impact on the Group’s businesses.With increasing raw material costs, the Group will continue to review the retail prices of its products taking into account competitors’ actions in the key markets. The Group will continuously focus its efforts on the dual-engine of growth – Branded Consumer and Ingredients sales. In view of the robust demand for the Group’s non-dairy creamer, especially in the China market, management is installing an additional production line to expand the Group’s annual production capacity to 100,000 metric tons from 75,000 metric tons by 3Q11.The Group concludes the current financial year with a cash reserve of S$141.8 million and will continue to grow its core businesses and strengthen its brand. Management will also seek out synergistic business opportunities and ventures to enhance shareholder’s value.”

I will be keeping a keen watch on the Robusta coffee prices as 4Q10 GPM dipped 7ppt to 32% (4Q09: 39%) due to spike in coffee prices. I’ve confidence in the management and I’m sure they will be able to weather through the rising costs, just like how they have done over the past year by raising the selling prices, selling higher margin products and lower production costs. Additional production line is also going to be installed to increase Super’s annual production capacity. I will be looking at how this pans out for FY2011.

Super Group Analysis – Part 3

Now, let’s look at the intrinsic value and do simple techincal analysis on Super Group.

Intrinsic Value

The intrinsic value I calculated is below the current share price with 25% MOS. However, I would like to wait till the TDRs has been issued to see how the market responds and to mitigate some dilution. I’m just very risk averse or “kiasee” you can say.

Techincals

Super seems to be in a downtrend in a channel now according to the charts below. The price is also below the 25 and 50 day moving averages.

Super Group Analysis – Part 2

Now, let’s look at the financials and future growth factors of Super Group.

Financials

The revenue in FY2009 dipped just 1.3% compared to FY2008 when some companies went under the water due to the financial crisis. The gross profit is at 34.9% after having better product mix and improved branding. The net profit margin increased to be the highest at 13.57%. The gross profit margins in FY2008 bottomed as the prices of raw materials like sugar and coffee hit its highs. Now that the prices have stabilized, gross profit margins may peak above 42.5% (FY2004) in the near future.

Looking at its strong balance sheet, Super is hoarding on lots of cash. This can pave way for M&As and allows reinvestment into its company to expand its reach, especially in China and Taiwan. They have very negligible debt as well. Super is cash-rich. The ROE and ROA is the highest among the years. ROE is above 12% even though it is holding on to lots of cash.

Its CAPEX has dipped quite a bit over the past 2 years. I believe this is because of the plants and facilities that have already been built and running. This is good as Super can now concentrate on promoting its products and widening its reach to untapped markets. Due to low CAPEX, Super has the ability to generate lots of free cashflow. It is estimated that the free cashflow will be at least $30mil/year in the near future.

The dividend payout ratio is maintained at around 20%, even though investors believe this might go up after the Taiwan Depository Receipts (TDRs) issuance (to be discussed later).

Future growth

Since Taiwan accounts for a very significant contribution to its revenues, Super is proposing issuing TDRs on the Taiwan Stock Exchange. This would allow Super to raise $30 million. Although this would dilute the shares, the issuance will raise its profile and increase its market share in Taiwan, which is Super’s fastest growing market. Furthermore, consumer sector plays listed in Taiwan are rated more highly than in Singapore. With so much cash already in its balance sheet and with the additional capital injection, special dividends might be given to shareholders to reward them.

The firm also plans to double its capacity for making non-dairy creamers in China to 50,000 tonnes by the year-end. It also intends to capture a 50% market share in Taiwan for imported instant coffee power and non-dairy creamers. Super can capitalize on its Singapore branding and quality to capture this market, following the tainted milk scare in China not long ago.

Furthermore, Super is re-branding itself to appeal more to the younger consumers. Super surely knows the benefits of re-branding, having done a successful exercise in 2007. In that year, it re-packaged its Ipoh White Coffee and sales shot up 12-fold!

The R&D team of Super is targeting to introduce 4-5 new product variants every year.

Super is looking into opening a high-profile store to showcase its top-end beverage products. Nescafe has a similar concept in Grapevine, Texas, USA. More info at http://www.nestlecafe.com/ I think Super is looking into such a concept.

Super hopes to increase its footing in Indonesia by joining forces with a formidable local partner. It is also looking to work more closely with Yeo Hiap Seng (YHS) (owns 12% of Super) to increase its distribution reach in Malaysia, in which YHS has a strong presence.

Super has grabbed niche market segments by having product extension such as “reduced sugar” coffee and functional product lines like tongkat ali coffee. This was the brainchild of Elaine Teo, daughter of  the group’s general manager. The general manager has his sons and daughters involved in the firm. Since it’s a family business, there might be things in place to benefit the family members only and solid ideas suggested might not come to pass due to family hierarchy. However, I do not see this as a huge problem as the management has been created high ROE and share buybacks has been done in 2002, 2005, 2008 and 2009 as well. The company has created growth and has future growth drivers in place through various means as discussed. The Teo and Te families own 39% of the total shares.

Super manages supplier risk by sourcing coffee beans from various countries such as Indonesia, Vietnam, Brazil and Colombia. It also has pricing power as raw material costs increased the past few years but its gross profit margins have not eroded much. It increased selling prices by around 15% progressively to keep gross profit margins stable.

In Part 3, I will look at the intrinsic value and technicals of Super.

Super Group Analysis – Part 1

I recently did an analysis on Super Group after reading articles published in March and July editions of Pulses magazine.

Overview of Super Group

Super is well-known for its 3-in-1 instant coffeemix, especially in Singapore and Asia. It is the only company in Singapore and the region with the manufacturing capability for instant coffee, instant cereals and non-dairy products. Super has a distribution reach of over 50 countries and it is one of the top three market leaders in the South-east Asian markets. According to AC Nielsen, Super has a market share of about 37% in Singapore, 13% in Malaysia and above 30% in both Myanmar and Thailand.

The group has more than 300 products such as instant coffee and tea, instant cereal, flavoured can drinks, cup noodles and potato chips. The Super brand alone was valued at $87 million this year and this brand equity increased 67% from $52 mil in 2006. Super is also the only manufacturer in SEA contracted by Procter & Gamble to produce its Pringles potato chips since 2004. Its products are manufactured under stringent conditions in accordance to ISO 22000 and HACCP certifications.

The group has an ingredients division that sold products to the top five milk tea players in China. This division was started in 2007 to have vertical integration to better control the quality of raw materials. Half the ingredients are produced for internal usage while the rest are sold to external parties. This allowed Super to move into the business-to-business segment.

Super has 12 manufacturing plants located in Singapore, Malaysia, Myanmar, Thailand and China which cost a total of $188 million. The sophisticated facilities provide barriers to entry to potential competitors.  The highly automated facility also reduces manpower costs and provides high quality product control. Its plants also have a successful system in place which gives the instant coffee the aroma of a freshly brewed cup. The plants are also scalable to double the annual production volume for ingredients.

Super has also won numerous awards including the Brand Laureate “Best Brand in Food and Beverage – Coffee” and “Best Brand Category, Brand Communication – Coffee” in 2009 for consecutive years. It also won Finance Brands Award’s “Singapore Top 100 Brands” this year.

Economic moat: Quite a wide moat, especially in Asia. Has pricing power (will be discussed later), lots of awards won, high barriers to entry (sophisticated manufacturing plants) and brand value. Super is in a highly competitive industry but it has created a brand for itself.

In Part 2, I will discuss the financials and the future growth factors.