Regional growth traction better than expected. We see evidence in recent quarters that sales growth for its branded consumer products will be better than expected. This is a testament to Super’s defensible market share and the potential of a fast growing ASEAN consumption market. 2Q12’s flat sale in this category is not indicative of underlying growth, due to unusual seasonality in its biggest market, Thailand last year. We expect 2nd half sales growth to be much stronger and sales CAGR of 12-15% over the next three years.

Rebranding exercise to spur sales in 2013. This is expected to roll out in early 2013, which we believe will freshen the brand and provide immediate tangible uplift to sales. The most recent example is the rebranding of the OWL brand in 2H11, which is estimated to have experienced sales growth of 10%. The Group currently employs a multi-brand strategy and a clearer distinction of customer segment through this exercise will allow them to compete more effectively.

Achieving good margins for ingredients sale. One of our earlier concerns was the lower margins for ingredients sale, which may drag down overall gross margins as their contribution increase. However, with a combination of higher value-add and customization, we understand this segment has actually seen significantly improved gross margin this year to 23-28%, closer to overall group levels.

Attractive M&A target. Given its position as a market leader across fast-growing ASEAN markets, with a fully-integrated model from manufacturing to distribution, we believe Super may become an attractive M&A target for other F&B players. With Yeo Hiap Seng in the midst of restructuring, we think its 12% stake in Super may become a non-core investment up for sale. This may attract strategic investors or even trigger a possible tussle for control down the road.

Upgrade to BUY. We adjust our FY12-FY14F estimates upward by 10-12% to account mainly for stronger sales growth. We also expect heightened M&A interest within the F&B space to provide a re-rating catalyst above Super’s historical PER range. Upgrade to BUY, with a TP of SGD2.85, pegged to 20x FY13F. We note that recent M&A transactions within this space have been in the range of 20-35x PER.

Source: Maybank Kim Eng Research - 27 Sep 2012