KUALA LUMPUR (Oct 2): Johor-based bakery products maker SDS Group Bhd (KL:SDS) will see strong earnings growth over the next three years from rising demand while a stronger ringgit could boost margins, Tradeview Research said.

SDS is gaining more market share due to its competitive price, expansion of its fleet to increase regional reach, and more shelf space and visibility for its ready-to-eat products in retail chains, Tradeview said in starting coverage of the stock.

“The strengthening ringgit against the US dollar also presents a favourable tailwind for SDS,” Tradeview said. “As many raw materials are imported, a stronger ringgit reduces material costs, leading to better profit margins.”

Tradeview, the only research house currently covering SDS, has the stock on a “buy”’ call with target price of RM1.67. That implies a 31% increase from its last price of RM1.27 after a 72% year-to-date rally.

SDS sells baked goods across Peninsular Malaysia under the "Top Baker" and "Daily's" brands as well as its “S.D.S” retail outlets.

Revenue could rise 9%-12% for FY2025-FY2027 while core earnings per share may increase 11.8%-23.9% over the same period, supported by positive same-store sales growth, according to estimates from Tradeview. Return on equity, meanwhile, could exceed 20%, it said.

That indicates “strong and sustained profitability,” Tradeview noted.

Plans by SDS to add 20 more trucks in FY2025 to its current fleet of 320 trucks will improve distribution capacity and boost revenue for the wholesale segment that accounted for two-thirds of total revenue in FY2024, Tradeview said.

In retail space, Tradeview took into account SDS’ target to open up to five new retail outlets, combining café and bakery concepts in FY2025, on top of its existing 39 stores.

“Singaporean tourists have been a critical driver for this segment, especially with most outlets in Johor, which has seen a surge in revenue post-pandemic,” it added.

SDS’ net profit for the three months ended June 30, 2024 (1QFY2025) jumped 80.71% to RM8.94 million from RM4.95 million a year earlier, thanks to higher revenue from wholesale. Revenue rose 16.47% year-on-year to RM83.01 million from RM71.27 million.

The company has also paid an interim dividend of 0.40 sen per share for the quarter.

For the financial year ended March 31, 2024 (FY2024), the group’s net profit rose 32.7% to RM32.55 million from RM24.53 million in FY2023. Revenue grew 14.24% to RM324.06 million as compared to RM283.67 million. It declared a total dividend of 1.65 sen per share for FY2024.