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.


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