Super Group Featured in Straits Times

On 8th January 2013, Straits Times ran an article on Super Group, entitled “Right ingredients for a successful brew” and on 4th February 2013, it featured another article, entitled “‘Regional wings’ strategy helps Super Group grow”. I will summarise the salient points covered in those two articles in this blog post.

“Right ingredients for a successful brew” article

  • Chairman of the firm, Mr David Teo, believes two factors have driven the company so far: becoming focused on its core products and having a strong regional strategy (incidentally the next article is about this). Back in 2008, the company sold off its non-core businesses, like the vending machines enterprise, and concentrated its energy and talent in the coffee business. At the same time, the company decided to sell the ingredients it was producing for its instant coffee mixes.
  • The firm produces its own ingredients to ensure product quality and make to make sure they are integrated from start to finish, unlike other instant coffee makers. Having started off to ensure consistency in its coffee products, the ingredients unit has since morphed into an immense source of revenue for the firm.
  • Super Group sells ingredients like creamers to ice cream makers and bottled drink companies.
  • The ingredients part of the business accounts for 31% of the revenue while the other 69% is accounted for by the consumer segment.
  • The company will continue focusing on its regional strategy in Asia.
  • Super is in the top three in several instant coffee markets, including Myanmar, Thailand and Singapore.
  • The company has been in Myanmar for over 15 years and has built a strong distribution network there with a partner. Most of the shops there are mom-and-pop shops so Super took a long time build their presence and sell directly to them.
  • Super is confident that its first-mover advantage and strong network will be enough to fend off competitors who are also eyeing the market in Myanmar.
  • The company is now focusing on increasing its presence in the region, including China. There is immense potential in the low- to middle-income group which sees coffee as a luxury item.

“‘Regional wings’ strategy helps Super Group grow” article

  • Super Group has three ingredients manufacturing facilities and six packaging plants in the region, including one of each in Singapore.
  • On top of rising costs in Singapore, the reason to move overseas was to localise itself in the various markets. This means making different blends of its instant coffee mixes for different markets and packaging them differently. For example, the Thais prefer their coffee sweeter so Super produces sweeter coffee there. While in Singapore, Singaporeans prefer lesser sugar. In Myanmar, Super recently came up with a sachet that has sugar on one side, separated from the coffee and creamer on the other side, so drinkers choose their own sweetness level.
  • Super Group continues to invent new products and packaging designs and it can do so efficiently due to its regionalisation strategy. For example, recently in Malaysia, the company took just six to eight months to roll out a new product – the “Super Power” range of five-in-one coffees, which are a blend of its white coffee mix with added ingredients like tongat ali, collagen and ginseng.
  • Since the company manufactures in Malaysia itself, it did not have to deal with import procedures, which are quite strict. The company could also get halal certification and other certificates all in the country itself, making things easier.
  • Even as it spreads its wings across the region, the company will keep its home base and some high-end manufacturing activities in Singapore. The local plant now makes high-end creamer and can create foam out of instant creamer and creamer that can dissolve in cold water to make instant iced-coffee.
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Scuttlebutting at Owl Cafe

On Friday, 21st September 2012, I decided to pay a visit to the newly opened Owl Cafe at The Star Vista Mall. Owl Cafe is owned by Super Group and is Super’s first foray into a physical store. The main purpose of my visit was to observe how the cafe looks like. I should say my overall experience was a satisfactory one. The cafe is located very near an escalator leading to the mall from Buona Vista MRT station. Thus, human traffic is high and I saw many people walking past the cafe to get access to the mall proper. Curious passers-by may pay a visit to the cafe since the Owl brand is well-known to many Singaporeans. The cafe has an outdoor seating area and an indoor air-conditioned one. The outdoor seating area is just in front of the MRT track and one can watch the trains go by.

 Outdoor seating area

Indoor seating area (right-side of cafe)

Indoor seating area (left-side of cafe)

The interior of the cafe is well-designed. It has a minimalist design and is well-lit up by designer hanging bulbs. The colours of the wall panel are consistent with the colour of their logo. There was also a stand holding various types of Owl coffee.

Hanging bulbs from the ceiling (ignore the ghostly images of the bulbs)

Design of the wall panel and hanging light

Owl coffee stand

The menu’s design was pleasing to the eyes. Once I opened the menu, there was a design of an owl made up of coffee beans and I found it extremely creative.

Menu

Creative design of an owl

I ordered a Cheesy Ayam Cutlet main course together with Gula Melaka Cham Teh drink which is a concoction of coffee, tea and gula melaka (palm sugar). Both were the Chef’s Recommendation and I was not disappointed. The chicken was sumptuous and the price was reasonable. The drink was unique as it was the first time I drank a mixture of coffee and tea. The cafe also sells the priced kopi luwak, one of the world’s most expensive coffee.

Cheesy chicken

Food and drinks ordered by my friends and me

Two staff came to ask feedback about the food. At around 7pm, the cafe started to get crowded and the indoor area was almost full, surprisingly. I guess many wanted to try out the new cafe. It will be interesting to note if the crowds will be sustained many months later.

 Indoor seating area almost full at around 7pm

We left at around 7.30pm after paying our bills. To our pleasure, we received a free gift for spending more than $20. It is a sample of the all the coffees under the Kopitiam Roast product class.

Free gift (front)

Free gift (back)

Free gift (the contents)

A name card of the cafe was placed near the payment counter.

Name card (front)

Name card (back)

I enjoyed my trip to the cafe and I would not mind going back again for drinks and food. The website of the cafe can be found here for those who want to learn more about the cafe.

I have two suggestions to spruce up the revenue stream of the cafe. One is to allows customers to sample the various coffees offered by Owl ala Brewerkz style. At Brewerkz, customers can buy small samples of the beers offered by the brewery and then can decide which beer to buy. Another suggestion would be to have a discount card. This helps to create brand loyalty and brings repeated customers to the cafe.

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 lowering 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.