This article first appeared in The Edge Malaysia Weekly on November 18, 2024 - November 24, 2024

SDS Group Bhd (KL:SDS), a Johor-based manufacturer and retailer of bakery products, is on a roll with its financial performance.

Buoyed by a steady expansion of its retail outlets and wholesale distribution network, the homegrown confectionary specialist’s net profit has grown steadily over the years, reaching a record high of RM32.55 million in the financial year ended March 31, 2024 (FY2024).

SDS may not be a well-known name to those outside Johor, but within the southernmost state, it has garnered a strong reputation as a go-to bakery, particularly among the lower-income group. Known for its affordable and quality baked goods, SDS is a popular choice for birthday cakes and everyday pastries.

Its outlets are also a frequent stop for Singaporean visitors, who often purchase large quantities of pastries to take home, reflecting the brand’s appeal across the straits. In fact, customers from Singapore contributed to about 6% of the group’s turnover in FY2024.

Today, SDS operates 40 retail outlets, comprising 17 bakery-only stores, two cafeterias and 21 bakery-cum-café outlets. Of the 40 outlets, 32 are located within Johor Bahru while the rest are in other states.

SDS chief financial officer Tan Kee Meng says, over the last few years, the group has been expanding its retail outlets and delivery fleet in the central region, as well as on its home turf of Johor Bahru.

“All these efforts are meant to increase our product range and coverage area, and they are bearing fruit now. That’s why you can see that our earnings have been growing steadily and our net margins have improved a lot,” he tells The Edge in a virtual interview.

SDS was listed on the ACE Market of Bursa Malaysia in October 2019, before migrating to the Main Market in May 2023. Since then, the group has embarked on a few growth initiatives, including expanding its wholesale distribution network and retail presence.

Its turnover has increased almost every year, growing from RM191.52 million in FY2020 to RM324.06 million in FY2024. Earnings growth has been even more impressive, with net profit climbing from RM4.07 million in FY2020 to an all-time high of RM32.55 million in FY2024 — a nearly eightfold increase.

Indeed, SDS’ net margin has shown significant improvement, rising from 2% in FY2020 to 5% in FY2022, and reaching 10% in FY2024. This growth can be attributed to the company’s efforts in streamlining its operations and implementing effective cost management strategies.

The upward earnings trend continued into the first quarter ended June 30, 2024 (1QFY2025), with net profit coming in at RM8.94 million on the back of RM83.01 million in revenue, positioning SDS for potentially another record-breaking year.

As of end-June, the company’s cash and cash equivalents stood at RM39.07 million against total borrowings of RM21.37 million, resulting in a net cash position of RM17.7 million.

The 36-year-old Tan, who is the son of SDS co-founder and managing director Tan Kim Seng, points out that some of these expansion projects were planned before the company’s listing in 2019.

Unfortunately, they were delayed by the Covid-19 pandemic, given the dining restrictions during the lockdown period, which led to a decrease in consumer traffic and, consequently, slower revenue growth.

Nevertheless, SDS did a couple of things during the pandemic to mitigate the impact.

“First, we enhanced our delivery services by setting up our own delivery team and collaborating with the e-commerce platforms. Second, we streamlined our manufacturing operations by improving our efficiency via automation.

“Third, we expanded beyond Johor, and established our first wholesale distribution centre in Kedah. And finally, with the growing trend of working from home and changing consumer behaviour, we had also introduced a ready-to-eat, ready-to-drink series of products,” he says.

SDS began as a small bakery named Sin Lee Hiang Bakery in a shoplot in Masai, Johor Bahru, in 1987. It was co-founded by Kim Seng and his younger brother, Tan Kim Chai, who now serves as the group’s executive director.

In 1993, SDS expanded production to its current factory in Kempas, Johor Bahru. The bakery firm also expanded from its Johor home base to cover Peninsular Malaysia, operating under three brands, namely the retail brand SDS, and two wholesale brands, Top Baker and Daily’s, which it acquired in 2008 and 2016 respectively.

The products of Daily’s are sold in hypermarkets, supermarkets and convenience stores, whereas Top Baker’s products are usually sold in the traditional trade channels such as grocery and sundry shops. The wholesale segment contributes about 60% of the group’s total revenue.

The 67-year-old Kim Seng and the 62-year-old Kim Chai are the major shareholders of SDS, each holding an approximate 24% stake in the company.

Its top 30 largest shareholders include executive director Tan Yon Haw (the 47-year-old nephew of Kim Seng and Kim Chai), Kenanga Shariah Growth Opportunities Fund, Tan Sri Chua Ma Yu’s CMY Incubator Sdn Bhd, as well as boutique fund house Ethereal Capital Sdn Bhd.

Year to date, SDS’ share price has gained 62% to close at RM1.15 last Thursday (Nov 14), giving the company a market capitalisation of RM471.08 million. The counter is currently trading at a historical price-earnings ratio (PER) of 12.8 times.

Tradeview Research analyst Tan Jia Hui recently initiated a “buy” call on SDS with a target price of RM1.67, which is based on FY2026 PER of 15 times, in line with its indirect peer that serves baked goods to the mass market.

“We are projecting stronger earnings growth from both wholesale and retail segments. We also project its return on equity (ROE) to exceed 20% from FY2025 to FY2027, indicating strong and sustained profitability,” she says in an Oct 2 report.

Jia Hui notes that Singaporean tourists have been a critical driver for the retail segment, as most SDS outlets in Johor have seen a surge in revenue, post-pandemic.

“We anticipate revenue growth of 9%-12% for FY2025-FY2027, supported by positive same-store sales growth (SSSG) of 2% annually versus 13% in FY2024,” she says.

As for the wholesale segment, Tradeview Research projects a steady revenue growth of 10% annually from FY2025 to FY2027, taking into account that SDS plans to expand its fleet by adding 20 more trucks in FY2025, complementing its current fleet of 320 as at 1QFY2025.

“This more extensive fleet will allow SDS to increase distribution frequency in established markets while strategically expanding into new regions, including the Klang Valley and the northern area,” says Jia Hui.

The research house projects SDS’ net profit to continue reaching new highs, with a forecast of RM40.7 million in FY2025, RM46 million in FY2026 and RM51.4 million in FY2027.

When asked about profit guidance, SDS’ Tan declined to provide specifics, stating only that the group remains cautiously optimistic about the outlook for Malaysia’s bakery and café sector.

“We can see competition intensifying after the pandemic. Hence, we continue to focus on managing the group’s operational costs, while also understanding the consumer preference and updating our product offerings to meet the ever-changing customers’ needs and preferences,” he explains.

According to him, the key drivers of SDS’ growth are the continued expansion of its retail segment through the opening of new outlets, and the strengthening of its wholesale distribution network, particularly by expanding its delivery fleet to enhance market reach.

“We are enhancing our distribution network by reviewing and reorganising delivery routes, which helps reduce transport costs and improve supply chain efficiency,” Tan reiterates.

SDS currently operates two manufacturing plants. The first plant in Johor Bahru manufactures bakery products for the retail and wholesale segment, while the second plant in Seremban, Negeri Sembilan, manufactures products for the wholesale segment.

“Overall, we are satisfied with our current utilisation rate of 70%-80%. If needed, we could produce more as we have sufficient installed capacity. Every year, we would allocate a certain budget to upgrade our production lines to improve our efficiency,” says Tan.

Interestingly, SDS opened its first two retail outlets outside Johor, in Nilai and Bangi, and established its first wholesale distribution centre in Kedah in 2020.

“We see the potential in the central and northern region as there is potential for growth and untapped market opportunities for us. Meanwhile, we are also expanding in Johor, given that there are still areas where we are not present at the moment,” says Tan.

He, however, notes that whether the new retail outlets are bakery-only, cafeteria or bakery-cum-café will depend on the location, shop type and demographic.

“We prefer to expand with careful attention to market conditions, operational efficiency and strategic locations,” Tan concludes. 

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