Super Group

[LLI]

The R&D of Super is pretty strong

[Tiggerbee]

I think you are referring to their ability to customize the formula of the ingredients that they provide to the customers in the ingredients biz. Unfortunately, that biz segment is suffering from declining rev due to issues that the management had attributed to the loss of focus of their distributor in a China, and had appointed a new distributor to take over that job. It remains to be seen if the new distributor is able to do a better job.

And if Super has superior R&D capability, why are they not differentiating the taste between Owl and Super brand of white coffee. I've tried both and the taste is exactly the same saved for the packaging. Have anyone tried both?

[Tiggerbee]

Stanchart lowered Super's TP to $1.34.

https://8bf1087e-a-62cb3a1a-s-sites.goog...edirects=0

[eve]

Stanchart lowered Super's TP to $1.34.

https://8bf1087e-a-62cb3a1a-s-sites.goog...edirects=0

Food for Thought:

http://www.fool.sg/2014/06/18/super-grou...e-to-flee/

[Muser]

What can go wrong with this business?

- consumption driven branded FMCG biz, and supported by fast growing food ingredients biz and new products in the pipeline.
- Sustained ROE, sales & profit growth over past 5 years
- Investing in building brands to differentiate, and improve pricing power

I estimate its IV is much higher than its CMP of $1.42

Why can't this be the Nestle of ASEAN?

[CY09]

What can go wrong with this business?

- consumption driven branded FMCG biz, and supported by fast growing food ingredients biz and new products in the pipeline.
- Sustained ROE, sales & profit growth over past 5 years
- Investing in building brands to differentiate, and improve pricing power

I estimate its IV is much higher than its CMP of $1.42

Why can't this be the Nestle of ASEAN?

Hi Muser,

No doubt it can be the NESTLE of asean.

However, one must consider the following:

1) Super will be earning approx 6.5 cent EPS this FY
2) The latest FY will no include any one time earning, no more amortization gain of sale and lease buyback of property, sale of subsidiary, food ingredient tremendous sales has stopped and is now growing at stable level. Therefore, it is likely to be a good reference of Super's group underlying business performance
3) Asean is a growing economy, however at 22x PE, is the future growth already priced in to the current market price

[Muser]

What can go wrong with this business?

- consumption driven branded FMCG biz, and supported by fast growing food ingredients biz and new products in the pipeline.
- Sustained ROE, sales & profit growth over past 5 years
- Investing in building brands to differentiate, and improve pricing power

I estimate its IV is much higher than its CMP of $1.42

Why can't this be the Nestle of ASEAN?

Hi Muser,

No doubt it can be the NESTLE of asean.

However, one must consider the following:

1) Super will be earning approx 6.5 cent EPS this FY
2) The latest FY will no include any one time earning, no more amortization gain of sale and lease buyback of property, sale of subsidiary, food ingredient tremendous sales has stopped and is now growing at stable level. Therefore, it is likely to be a good reference of Super's group underlying business performance
3) Asean is a growing economy, however at 22x PE, is the future growth already priced in to the current market price

- My estimate of Super's earnings power value based only on operating profits (not considering any other one time income) is much more than CMP.
- For a growing franchise like Super, future returns may come from earnings growth, not expansion of PE multiple.
- So a current high PE may not matter. We have to pay up for quality...many value investors have profited by doing this.

My concerns are 1. How well can Super grow its brands, differentiate itself and gain pricing power. 2. How well can Super compete with Nestle & other big brands.

[Art or Science]

Think there are still pockets of growth such as Botanical Herbal Extraction
and its track record in R&D for FI business is pretty good I guess. Supergroup has been willing to try out new products and so chances are that they will do so in the future?

As for risks:-
1) potential political escalation in Thailand?
2) Currency fluctuation (e.g. Myanmar kyat)?
3) Re-branding - hence, marketing and admin costs increase year on year?
4) Price war in the FMCG Biz?

Just my initial thoughts I'm looking at this counter

[smalkmus]

What can go wrong with this business?

- consumption driven branded FMCG biz, and supported by fast growing food ingredients biz and new products in the pipeline.
- Sustained ROE, sales & profit growth over past 5 years
- Investing in building brands to differentiate, and improve pricing power

I estimate its IV is much higher than its CMP of $1.42

Why can't this be the Nestle of ASEAN?

Hi Muser,

No doubt it can be the NESTLE of asean.

However, one must consider the following:

1) Super will be earning approx 6.5 cent EPS this FY
2) The latest FY will no include any one time earning, no more amortization gain of sale and lease buyback of property, sale of subsidiary, food ingredient tremendous sales has stopped and is now growing at stable level. Therefore, it is likely to be a good reference of Super's group underlying business performance
3) Asean is a growing economy, however at 22x PE, is the future growth already priced in to the current market price

- My estimate of Super's earnings power value based only on operating profits (not considering any other one time income) is much more than CMP.
- For a growing franchise like Super, future returns may come from earnings growth, not expansion of PE multiple.
- So a current high PE may not matter. We have to pay up for quality...many value investors have profited by doing this.

My concerns are 1. How well can Super grow its brands, differentiate itself and gain pricing power. 2. How well can Super compete with Nestle & other big brands.

Hi Muser

I see your belief in the quality of Super, but I feel there has been too much hype and the business has been over priced.

I work in the consumer product goods industry myself, and I would like to share what I personally feel is the challenge with Super and why it can't be the Nestle of ASEAN (within the next 5-7 years).

Firstly, the product that Super is involved with is highly commoditized. The FMCG market is seeing a trend of premium brand (gourmet coffee) and low end coffee (real dirt cheap) gaining share at the expense of the mainstream (mid tier brands - Nescafe and to a certain extent, Super). This explains the reason for Nestle to introduce Nespresso (and betting big on it) as well as trying to churn out more innovative and expensive products at Nescafe. The way for a company to solve this dilemma is to go localized (emphasizing on the unique and local quality of the product to target the domestic market. Super in my observation, doesn't have the premium image, and ability to stretch their brand. It takes years and consistency to widen the moat. A brand such as Coca Cola only has 50-60% brand loyalty, Super is competing in a low loyalty category where variety is key to consumer. At the same time, a lesser brand name doesn't allow them to earn higher margin to reinvest. At this current price, it's a bit too much for my stomach.

Another issue with Super right now is the product range has not been extensive enough, which is critical. That's why Nestle, Pepsi, Kraft, Mondelez like to do cross category expansion. This helps in expanding the power of negotiation. Key accounts such as DFI and the likes of it, are slowly taking the profits of the smaller FMCG companies, that why the mergers of food companies happen in USA pretty much nowadays.

I know a lot of buddies will point to their regional efforts over the past years which I am actually impressed by what Super has done. Do note that, a few pointers from some of my customers (whom are coffee producers themselves) are as such. The Myanmar environment has changed a fair bit, the local players have started a lot more savvy marketing effort and have entered into Super's territory. At the same time, Nestle is entering the market in a conservative manner. This does not bode well. My customer in Vietnam has also commented that the Vietnamese are very loyal to their Vietnam coffee, which Super does not command. Other buddies are free to enlighten me on the other regional efforts of Super.

However, I feel that all is not lost for Super. If they can expand and make their product a premium category in the developing markets, they can reap the benefits for years to come. The challenge is to get their strategy and consistency right.

A lot of investor will always say this about FMCG companies,'people will still need to eat, drink, smoke, etc etc or consumer". My reply will always be, yes they will always do that, the problem is it your product and what is your share of market in this context. People will always need to eat biscuits, but the challenge will be, are they eating Khong Guan or eating Oreos.

On a side note, as with the idea they can be Nestle of ASEAN, I personally feel a better bet will be FNN. Super needs to diversify successfully in order to be at that level.

Just my 2 cents worth. Apologies if there are any analytical mistakes.

[Tiggerbee]

If you read the reports of other instant coffee companies, you will find out that they are all gunning for the same markets that Super had a presence. Be it in Thailand, Singapore, Taiwan or China. The regional coffee brands are expanding beyond their home turf and this will only result in pricing pressure and more money pouring into advertising and promotional activities. All these companies are seeing narrower margins due to higher operating costs (advertising and promotional expenses increasing the most).

I'm pretty amazed that the Stanchart analyst had only recently visited the supermarts. I had been doing so for the past 2 years since I started monitoring Super. From an investor 2 years ago, I had reversed my long position to a short position after seeing the deterioration of their fundamentals 3 qtrs ago. Investment is not just buying the right stocks, but also shorting the right ones, especially those that are over valued.

In terms of branding power, Nestle's Nescafé is no doubt the number one. The other brands, including Super, do not have as much branding power as Nescafé. It's all about branding, pricing and taste. If you can't compete in terms of brand perception and taste, you can only compete in pricing. As of now, Super is only mediocre in branding, mediocre in taste and mediocre in pricing. In other words, demand from consumers will be mediocre.

It had relied on the ingredients segment growth to make up for its lack luster consumer branded biz. Now that that shine had worn off, it's true colors had been revealed. It's only hope is to revive the growth engine in its ingredients biz again.

(Not vested or short at the moment)