3Q13 significantly below expectations. Results were disappointing on most fronts, especially after 10 consecutive quarters of YoY profit growth. Growth in branded consumer sales into China was the only bright spot. Even excluding one-off items, net profit of SGD19.5m was down 3% YoY. The trends and outlook are worrying in the short-term, heading into the fourth quarter which is seasonally strongest for the company.

Branded consumer segment declined 3% YoY. Sales into Philippines surprisingly fell 51% yoy after two strong quarters in this promising market. Management attributed this to intense competition, as competitors introduced more products. The Group was also affected by local currency depreciation in Myanmar, as it made Super’s USD-denominated products (to distributors) more expensive. Management will likely reduce pricing to help their distributors in the meantime.

Growth in the ingredients sales division lower than expected. This segment grew 12.5% YoY, but the growth came from soluble coffee where capacity doubled YoY. Non-dairy creamer, a larger subdivision, saw sales decline 7% YoY. This was attributed to lower demand volume from customers in China, which are experiencing flattish sales for milk tea and other instant beverages. Management also warned that customers are diversifying suppliers, which may affect demand. p

Short-term outlook not promising. 3Q13 operating expenses surged 42% YoY, higher than expected, due to higher branding expenses and overheads. Management expects to continue investing in brand-building in China (where sales were up 24% yoy) and other markets. Consequently we now expect these expenses to remain heightened into 2014. Management also warned of possible adverse effect in Philippines this quarter due to the super typhoon Haiyan.

Downgrade to HOLD. We cut our FY13-FY15F estimates by 14-18%, on lower revenue growth assumptions and higher expenses. Our DCF TP is reduced to SGD4.55, implying 25x FY14F. We still like Super’s long-term story, but would prefer to remain cautious until we see more positive development on current weak operating trends.

Source: Maybank Kim Eng Research - 12 Nov 2013