Super Group

[csl123]

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.

Good points. Super's products do seem to be in the low-loyalty category. Not sure how higher spends on branding will improve loyalty, market share & pricing power.

However, most successful FMCG companies like Nestle & Coca Cola have had humble beginnings. Does Super have the ingredients to be a greater FMCG success story over next 5-7 years?

Spending in branding and advertising is key to such low involvement products. You will not buy what you don't remember for such products. Of course, Super can adopt a low-cost leader strategy, by being the cheapest product on the supermarket shelf.

My personal opinion is to continue with a low cost and high volume business model. Only take on the big boys using a different, premium brand when it has the necessary financial muscle.

[dxdx]

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.

Good points. Super's products do seem to be in the low-loyalty category. Not sure how higher spends on branding will improve loyalty, market share & pricing power.

However, most successful FMCG companies like Nestle & Coca Cola have had humble beginnings. Does Super have the ingredients to be a greater FMCG success story over next 5-7 years?

Spending in branding and advertising is key to such low involvement products. You will not buy what you don't remember for such products. Of course, Super can adopt a low-cost leader strategy, by being the cheapest product on the supermarket shelf.

My personal opinion is to continue with a low cost and high volume business model. Only take on the big boys using a different, premium brand when it has the necessary financial muscle.

Yes I agree, and it seems like Super is trying to go down that road. Their core strategy has been to increase marketing presence in their targeted segments. However, whether this will work, especially for new markets, proves questionable. On the other hand, they are gunning for the volume driven business of Food Ingredients, which has low margins but can be scaled substantially.

In the end, the nature of instant coffee is, by itself, a low value good. Branding will help differentiation and increase pricing power, but this does not change the inherent good's value. No one is going to pay more for 3 in 1s vis-a-vis grinded Arabica blends. On the flip side, instant coffee and food ingredients is often an assured household item, thereby having defensive properties in downturns.

Insofar, ignoring financials, I think Super's advantage is its established brand which it has painstakingly cultvated over the years (remember those PSC nights on Channel 8?), and I'm guessing across the SEA region. However, unless it moves up the value chain, it will be akin to a simple trading company without much pricing power, and simply making a cut from volume sold.

[ValueBeliever]

Does it make sense to brand the product all the way down to opening coffee shop? There is no synergy and perhaps could endanger their manufacturing for 3rd party business, eg diary cream. Super had lost it focus in the market place.

Go check it out NTUCFair price best seller is back to Nescafe and other brands from Malaysia, Indonesia and Vietnam are now pricing their product sometimes above/near Super price level. Obviously, the foreigners working in Singapore might have helped in taste preference, but more important is that Super is losing its focus in its core business while the competitors are gaining traction. Even Nescafe is now gaining an edge on its white coffee and branding it at premium price (in local context - packaging it local and a few cents is already premium). Or what about competition from G7 and Indocafe which probably is improving in bean selection & thus better aroma? All these point to stronger competition which Super is not facing up to?

Looks like trouble ahead for Super?

[investor101]

I am willing to pay more for quality 3-in-1. When I see Super vs Oldtown 3-in-1, I am willing to pay for more Oldtown. This could be because I drink coffee at Oldtown's cafes, and link their coffee to higher quality.

As for Super, it is just 3-in-1. If their prices goes up, I simply switch to their competitors. Agreed that Super needs to go up the value chain.

[LocalOptimal]

Initiated a position at 1.30 today. To me, this is a now a defensive stock with a decent yield. The growth story has unfortunately halted for the moment and the market has stopped valuing at prices it used to be at. Waiting to see how it'll turn out in the next few quarters.

[Kelvin]

compelling entry price now?

[CY09]

I will not advise entering, see my earlier post at pg 10 etc

(Still bearish)

[Tiggerbee]

Technically, Super had broken the previous strong support level of $1.36 and looks to test its next support level at $1.05.

Fundamentally, valuation is still not cheap at 19x forward PE. Unless they can start to grow revenue and stop the margin erosion, investors might continue to sell the stock.

Even Oldtown was sold down more than 15% due to margin concern.

[eve]

Hi all,

I have been reading the past posts and have learnt a lot through the discussions. There's much focus on Super's coffee. How about its other products like the cereals and the organic soya milk beverage? Personally, I use to drink another brand's more expensive Soya milk every night. But ever since, I tried Super's organic Soya milk, I have not switched back. Now, my whole family takes Super's Soya milk. Nicer and cheaper.

[LLS]

Super is down like 40% over the last 12 months
at close to 20 times estimated earnings it does look expensive
but for long term investors I think you could be paying a much lesser multi if they can improve earnings back in the years to come
(say 2-5 year period)