Super's recurring 3Q12 net profit of S$19m (+106% y-o-y; +12% q-o-q) was 16% above our S$17m projection as input raw material prices came in lower-thanexpected although the impact of their recent high prices could be felt in the next quarter. Administrative and selling expenses as percentage of sales were lower on better economies of scale. Both its consumer and ingredient divisions continued to see good demand and lifted overall revenue by 22% y-o-y to S$130m, which was slightly below our S$136m estimates. We fine-tune our margins assumptions and raise FY12-13F recurring earnings estimates by 5%- 16% to S$71m-S$87m respectively. Using a discounted cash flow model, we lift our TP to S$2.68 (previously S$2.12). Maintain NEUTRAL.

3Q12 revenue slightly below. Revenue came in S$6m below our expectation, presumably due to supply constraint from soluble coffee production that was running at close to full utilisation. Nonetheless, both divisions delivered commendable growth i.e. 19% and 29% for branded and ingredient sales respectively. Sales of its branded products to key Southeast Asian markets continue to grow, in particular for Malaysia, Myanmar, Philippines and Thailand. For ingredient sales, the company has also made inroads into the region e.g. Philippines and Thailand.

Margins gained on lower input costs. Coffee bean prices have dipped below US$2,000/tonne in Nov12 from their highs of US$2,200/tonne during May-Oct12. We estimate 3Q12 input costs to be around ~US$2,000/tonne, lower than our previous ~US$2,100/tonne projection, as the company could be drawing down inventory from earlier batches at ~US$1,900/tonnes. Hence, the impact of higher costs might have been delayed to 4Q12. Sugar and palm oil prices have also softened to their year-lows at US$510/tonne and US$710/tonne in Nov12 (YTD12: US$590 and US$942 respectively).

Fine-tuning estimates. We believe margins for 4Q12 could be weaker due to higher input costs, although they should improve strongly into 2013 if raw material prices continue to stay at current lows. Hence, we adjust our 4Q12 recurring profit estimates to S$17.6m (previously S$17.0m). In addition, our FY12-13F recurring earnings estimates are raised by 5%-16% to S$71m-S$87m respectively.

Maintain NEUTRAL at new S$2.68 TP. We believe discounted cash flow would be an appropriate valuation for Super given the stable and cash-generative nature of its consumer business, which would see ROE improving to 18% in 2012 (compared to 10% in 2007 before its restructuring exercise to focus on F&B businesses). Our valuation assumes a weighted average cost of capital of 9.0% and a terminal growth of 3%. These lead to a target value of S$2.68. A sensitivity analysis further suggests a valuation range of S$1.80-S$5.40.

Key risks. Upside potential to our NEUTRAL call includes better margins from an improved product mix and higher dividend payout ratios. Downside risks include sharp spike in input prices i.e. Robusta coffee beans, palm oil and sugar.

Source: OSK