Super Group, the owner of one of the leading 3-in-1 instant coffee brands in the region, is raking in record earnings. Its dual engines of growth — sales of consumer goods and ingredients — have lifted earnings to an all-time high of $47.48 million in the nine months to September and near-term prospects are even brighter.

The last quarter of the year is usually when Super Group’s sales peak, owing to a cooler climate in the markets where it operates (when consumers prefer hot beverages.) On Nov 11, Super Group reported net profit rose 49% to $13.59 million in 3QFY2010, on the back of a 12% hike in revenue to $86.8 million. Darren Teo, Super Group’s assistant business development manager, says 4Q earnings growth is expected to be strong as its new 25,000-tonne ingredients production line in Wuxi, China, will be operating at full capacity for the rest of the year to meet orders by milk tea manufacturers. “We are expecting similar growth as in 3Q,” he says. DMG & Partners is forecasting FY2010 profits of $49 million, a 21% y-o-y increase from $40.2 million in FY2009.

The strong 3Q results were backed by a steady gross profit margin of about 40% for the fourth consecutive quarter, a low debt-toequity ratio of 0.30 times and a cash balance that has swelled to $120.7 million. Inventories have also risen to $77.7 million from $55.26 million a year earlier, as the company is gearing up for increased production requirements and higher sales in 4Q.

 

While consumer goods sales grew 7% to $72.3 million in 3Q, ingredients sales climbed 47% to $14.5 million over the same period. Ingredients sales now make up 17% of total sales, compared with 13% a year earlier. Nondairy creamer accounted for 78% of total ingredients sales. In terms of geographic area, growth was particularly strong in East Asia, where robust demand in China for non-dairy creamer fuelled a 158% y-o-y growth. Sales in China spiked after a new production line came on stream at its non-dairy creamer plant in Wuxi, Jiangsu province in September.

 

But even with this new capacity, Super Group is still running a utilisation rate of up to 95% and company officials say they have had to turn away new customers. “We had a lot of enquiries from China and Taiwan following our [Taiwan Depository Receipts] listing,” Teo tells The Edge Singapore. Super Group listed 40 million TDRs on the Taipei Stock Exchange in September and the exercise raised the company’s profile in the Greater China region, leading to more enquiries from potential customers. 

 

Demand is so strong that the company is already building a new plant with a capacity of 75,000 tonnes in Wuxi. The first line with an additional 25,000 tonnes of capacity will be operational by next August. Company officials say they will then shift the bulk of its non-dairy creamer operations in Singapore to the new production line in Wuxi. It now has 50,000 tonnes of production capacity in Wuxi and 25,000 tonnes in Singapore. If demand continues to grow, Super Group can very quickly ramp up production by installing the remaining two lines in Wuxi with 25,000 tonnes of capacity each at a cost of only US$2 million to US$3 million.

 

In fact, Super Group is expected to expand ingredient production as it plans to target the previously untapped sector in Taiwan and China. These are the food and beverage customers that the company had been unable to serve in the past because of its supply constraints. The milk tea market is growing by leaps and bounds and there is also potential in café and bubble tea chains. The latter sell coffee at a third of the price of a cup of Starbucks coffee, so operators have to bring down their cost with non-dairy creamer instead of milk.

 

As for its plant in Singapore, it will be freed up to produce higher-margin products like fatfilled milk, which it is manufacturing for several customers, and ingredients like foaming and cold-water soluble creamers. Other than higher-margin ingredients, the company also wants to focus on higher-margin consumer products like its new organic instant soya milk and cereal products, which command gross profit margins of up to 50%. Super Group wants to bump up its share of revenue, which now stands at 10%, by introducing its soya milk beyond the two launch markets of Malaysia and Singapore.

 

The focus on higher-margin products is timely as the raw material prices used by the company are rising again to levels it last saw in 2008. The price of Robusta coffee, which makes up 30% of its raw material cost, has risen to two-year highs on speculation that bad weather in Vietnam, the largest producer of the crop, would affect the harvest. Sugar prices climbed to their highest levels in more than 30 years recently while palm oil prices are at their highest levels in more than two years. Palm kernel oil, which is used for making nondairy creamer, accounts for 30% of raw material cost while sugar and other ingredients make up the balance. “There will be impact from higher raw material prices but we will try our best to protect our margins by focusing on higher-margin products and controlling purchasing,” says the company’s financial controller Koh Chun Yuan.

 

Super Group also plans to pass on some of the higher costs to consumers by raising selling prices or downsizing its packaging as it did in 2008 when commodities prices last peaked. Can it repeat this strategy without alienating the market? Teo, who is chairman and CEO David Teo’s son, is confident that it will work again. “With the marketing and brand-building efforts we are doing, it is easier to pass on costs to consumers,” he says.

 

Moreover, other food makers like Kellogg, Unilever and Kraft Foods are doing the same thing. Unilever’s chief financial officer Jean-Marc Huet said at the company’s 3Q results briefing two weeks ago that commodities cost inflation was affecting its income and it had been raising prices for products such as tea, where there is significant cost inflation, without seeing any loss in volume share.

 

Nevertheless, Super Group’s gross profit margin had fallen to a low of 30% in 3QFY2008 before climbing to 40% in 4QFY2009. Standard Chartered’s analyst Pauline Lee says she is expecting its gross profit margin to ease to 39% in FY2010 and 37% in FY2011 to reflect the anticipated spike in raw materials prices. “That said, we believe the group’s constant improvement in product mix towards high-value products and rebranding exercise will lend support to margins,” she says in a Nov 12 research note.

 

Lee had called Super Group the most undervalued branded consumer stock in the region in an initiation report in September when she projected its ingredients sales doubling to $63 million from $31 million in 2009 over the next three years, and to “spawn a $1 billion company within the next five to 10 years”. Its production capacity is scalable and the potentially huge demand from F&B chains could surpass its branded consumer business in the long run, she says. Super Group now relies heavily on 3-in-1 coffee mixes, which contribute 66% to group revenue and deliver gross profit margins of 40% to 45%. Following the results, Lee raised her price target for the company to $1.58 from $1.39 and maintained her “outperform” ranking.

 

Kim Eng also raised its price target from $1.37 to $1.80 and maintained its “buy” ranking but DMG & Partners Securities’ analyst Tan Han Meng downgraded his recommendation to “neutral” and revised his price target to $1.24 from $1.06. Tan is concerned that after six consecutive quarters of expansion, gross profit margin could soon weaken owing to input cost rising and higher tax rates (tax breaks previously enjoyed by one of its subsidiaries is ending). Tan reduced his profit forecast for FY2010 by 4% to $49 million and for FY2011 by 14% to $47 million.

 

Super Group’s share price has climbed 87% since the beginning of the year and is now trading at 13.4 times forward earnings. Peers Petra Foods and Eu Yan Sang are trading at 16.9 times and 16.8 times respectively.

 

{jcomments on}