Share price gain has more legs. We maintain our positive view on Super. Recent 2Q13 results affirmed our investment thesis that the company will continue to be a major beneficiary of lower commodity prices. While share price has gained 47% YTD, we see further reasons to be optimistic because of (1) good traction in new markets which may become new growth pillars and (2) increasing importance as an ingredients supplier.

Good traction in new markets. While Super’s branded consumer revenue growth of 6% YTD appears to be lagging behind some peers, we believe this is due to revenue mix and market specific reasons (such as rioting in Myanmar earlier this year) rather than a loss of market share. Encouragingly, we see good traction in new markets which may become new growth pillars. For example, Philippines sales grew more than 25% YoY and it has just overtaken Singapore as the fifth largest geographical contributor.

Competition intensifying, but more than one way to make money. We are cognizant of the intensifying competition across ASEAN, but expect this to play out mostly in new product variations rather than price wars. This is also where Super’s increasing prominence as an ingredient supplier allows the company to benefit from the overall market growth even in countries where it does not have a strong brand yet. This quarter, soluble coffee sales almost doubled as the company has started to supply major players in South-East Asia.

A major beneficiary of lower commodity prices. While gross margins have improved from 29% in 3Q11 to 39% last quarter, a part of this is due to in-house manufacturing and economies of scale. As a fully integrated player and direct buyer of commodities, we believe the full potential of margin enhancement from softer commodity prices is still underestimated by the market. In our opinion, gross margins can surpass the heights of 40% achieved in 2010.

Reiterate BUY. We have raised our FY13-FY14 estimates by 11-13% mainly on higher margin assumptions and also tweaked our DCF assumptions (higher risk-free rate). This yields a TP of SGD6.10, implying 28.8x FY14F and upside of 28% from current levels.

Source: Maybank Kim Eng Research - 20 Aug 2013