Fair Value : S$2.85 | Recom : Market Perform | (Downgraded)

9MFY12 results above expectations. Super Group’s (Super) 9MFY12 net profit of S$57.8m (+49.7% YoY) was above expectations, accounting for 81% and 84% of our and consensus FY12 net profit forecasts. For 3QFY12, Super reported net profit of S$22.6m (+85.5% YoY, +29.0% QoQ), driven by stronger sales and improved gross margin.

3QFY12 revenue increased 21.5% YoY... For 3QFY12, Super’s revenue increased 21.5% YoY to S$130.1m driven by growth from: (i) its ingredients segment (+28.6% YoY) on back of robust sales in China (+35.3% YoY); and (ii) branded consumer products (+18.5% YoY) with improved sales from all regions such as Southeast Asia (+18.5% YoY), East Asia (+20.5% YoY) and others (+16.4% YoY).

...but net profit jumped 85.5% YoY on margin expansion. Super’s 3QFY12 net profit growth of 85.5% YoY is significantly higher than top-line growth due to a jump in gross margin on the back of weaker raw material prices (e.g. Robusta coffee beans, sugar and palm kernel oil) and operating leverage associated with higher capacity utilization rate. 3QFY12 gross profit margin improved 6.8%-pts YoY to 36.1% (2FY12: 35.7%). This was better than our expected gross margin of around 35%. We have expected gross margin to be slightly weaker QoQ due to higher ingredients sales, which fetched a lower margin than branded consumer products.

Will continue to benefit from stabilising/weakening commodity 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.

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.

Forecasts. We raise our FY12-14 earnings forecast by 5.7-7.9% to reflect the higher-than-expected 3QFY12 results and improved margins.

Investment case. We cut our call on the stock to Market Perform from Outperform with a higher fair value of S$2.85 (previously S$2.80) after raising our FY13 earnings forecast. Our fair value is based on a PER of 19x FY13 EPS (previously 20x), benchmarked to its regional listed peer valuation. While we like Super for its strong market position in Southeast Asia countries and good execution track record, we believe the run-up in Super’s share price (+35.2% in the past two months, +118.8% YTD) has already reflected its positives. We view its current price offers limited upside to our fair value.

Source: RHB Research - 09 Nov 2012