Fair Value : S$2.80 | Recom : Outperform (Maintained)

Expecting stronger 3QFY12 numbers. Super will be releasing its 3QFY12 results on 8 Nov 2012. We expect Super to report higher YoY 3QFY12 earnings (+38-40% YoY) driven by: (i) improved sales with stronger ingredient sales in China; and (ii) higher YoY gross margin with stabilising/weaker raw material costs. We expect Super’s 9MFY12 net profit to make up 73-74% of our FY12 annual forecast as its fourth quarter tends to be its strongest quarter historically.

Higher YoY sales expected in 3QFY12. We project Super to report higher YoY sales on the back of stronger ingredient sales, in particular nondairy creamer sales in China (increased production capacity from its nondairy creamer plant in Wuxi from Sep 2011), and organic growth in branded consumer products. Ingredient sales are seasonally higher in third and fourth quarters as F&B producers increase their production to meet higher consumer demand over year-end and Chinese New Year.

3QFY12 gross margin to be intact with stabilising/weakening commodity prices. We expect Super’s gross margin in 3QFY12 to be around 35% (slightly lower than 35.6% in 2QFY12 due to higher ingredient sales, but higher than 29.3% in 3QFY11) with stabilising/weakening raw material prices. Robusta coffee bean prices (accounting for around 30% of its total COGS) have stabilised around US$2,000-2,200/MT in the past 6 months, and dipped below the US$2,000/MT mark in recent weeks. In addition, weakness in palm oil and sugar selling prices are favourable to Super as palm kernel oil is a key input in the production of non-dairy creamer and sugar is used in its instant beverage products. Historically, the group’s gross margin tends to lag key raw material costs 3-6 months.

Forecasts. We leave our earnings forecast largely unchanged.

Risks. Key investment risks include: 1) sharp increase in raw material prices; 2) stiff competition from its current competitors and new entrants may erode its market share; and 3) lower-than-expected beverage consumption demand across the region.

Investment case. We maintain our Outperform call on the stock with an unchanged fair value of S$2.80 which is based on a PER of 20x FY13 EPS, benchmarked to its regional listed peer valuation. We like Super for its strong market position in Southeast Asia countries, execution track record and clear growth plans. We believe Super’s stronger 3QFY12 results would support our recommendation.

Source: RHB Research - 07 Nov 2012