AWAITING A DOUBLE SHOT OF CAFFEINE
Maintain HOLD; recovery in progress, but along a gradual pace
- We maintain our HOLD call for Super with a lower TP of S$1.25, pegged to a lower 20x FY16F PE, in line with its average valuation over the last four years. We believe earnings recovery momentum will be back-end loaded beyond 2H15F.
- Management may be lining up new products for launch over this period, but regional consumer sentiment remains tepid.
- Whilst we expect Super’s earnings to have bottomed and recovery should be currently in progress, we believe it will be of a gradual pace.
Looking for recovery confirmation post 25% share price drop.
- Super’s share price had earlier rallied from Feb to Apr on expectations of a strong and rapid earnings recovery in 2015, but this was not to be, unfortunately. Post a disappointing 1Q15 results, share price has corrected by 25% from its recent peak.
- We believe this has brought the market’s expectations to a realistic level, with valuations at c.20x FY15F PE and in line with its historical average. On a forward PE basis, there seems to be value at 18x on FY16 earnings, though we would prefer to get confirmation that earnings recovery is indeed taking place as per our expectations.
To follow results in ensuing quarters.
- 1Q15 core net profit fell 20% y-o-y to S$13.6m due to weaker sales from Philippines, Malaysia and exports, mitigated by Myanmar and Thailand. Malaysia was impacted by pre-GST destocking, while Philippines’ performance was undermined by product rationalisation.
- We are looking for lower rate of y-o-y earnings decline or significant margin expansion in the ensuing quarters.
Valuation: Pegged to 20x PE on slower growth.
- Our target price is now S$1.25, based on a 20x FY16F earnings multiple.
- We brought down our target valuation from 22x along with a slower growth expectation compared to three years ago. We also cut our FY15F/FY16F earnings by 6%/5% in view of slower-than-expected recovery.
- We believe a sustained recovery should help to re-rate the stock.
Key Risks to Our View: Surge in commodity prices.
- We expect Super to enjoy benefits of lower coffee bean prices which bottomed out at c.US$1,700/mt, and should aid in margins in 2H15. With expectations of an occurrence of El Nino this year, this could cause a surge in commodity prices and impinge on margins in FY16.
Source: DBS Group Research
