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Super Group’s Stale Brew Of Profits

Ser Jing - Super Group First Quarter Results, Strong Brew of Profit (pic)

Instant coffee-maker Super Group (SGX: S10) released its third quarter earnings in the afternoon and posted a double-digit decline in profits despite a rise in sales.

The company has two main business segments: Branded Consumer and Food Ingredients. The first is involved with the sale of instant coffee mixes (under brands like Super Coffee and Owl), instant tea, and cereals among others.

Meanwhile, under the Food Ingredients segment, Super Group manufactures various beverage-ingredients for sale to other beverage manufacturers. The ingredients are mainly classified under soluble coffee powders and non-dairy creamers.

Super Group’s geographical presence lies in East Asia (predominantly China) as well as  South-East Asian countries like Thailand, Myanmar, Malaysia, Vietnam, Indonesia and of course, Singapore.

Some basic numbers

For the quarter ended 30 Sep 2013, Super Group’s revenue was up by 2% year-on-year to S$133m. Profits, as mentioned earlier, had slipped 17% to S$18.7m.

The Food Ingredients segment grew 13% year-on-year to S$46m and helped push the company’s overall revenue upwards as the Branded Consumer segment saw its sales fall 3% to S$87m.

The former had experienced higher sales into Indonesia, which accounted for its top-line growth. Meanwhile, the latter segment’s revenue had slipped as there were lower sales into the Philippines market.

Super Group’s bottom-line had suffered mainly due to three reasons. First, there was a one-off gain from the sale of certain fixed assets that amounted to S$2.3m in the third quarter of 2012.

Next, the company’s associates and joint ventures had made a loss of S$0.3m compared to a gain of S$1.1m a year ago.

Lastly, its operating expenses had grown by 14% year-on-year to S$27.3m on the back of higher branding costs to promote the company’s new corporate logo and identity. Increased staff costs, due to higher salaries and a larger headcount, also contributed to the rise in operating expenses.

Operational highlights and the balance sheet

During the quarter, Food Ingredients continued gaining importance in Super Group’s business as it made up 35% of the company’s overall revenue compared to 31% a year ago.

Some highlights for the segment include a doubling in sales of soluble coffee powder from S$7.5m to S$15.1m. Meanwhile, the corresponding figure for non-dairy creamer had dipped by 7.2% to S$31m.

In terms of changes in revenue from the segment’s geographical markets, South-East Asia experienced an 82% year-on-year increase to S$24.2m while East Asian sales were down 26% to S$20.4m.

For the Branded Consumer segment, its product categories are classified under Coffee, Cereal, and Others. Sales from coffee had slipped by 5% to S$68m, while the other two categories both saw slight increases in sales to a combined total of S$18.9m from S$17.6m.

The segment saw sales decline by 4.6% year-on-year in South-East Asia to S$73.2m while sales into East Asia went up 24.5% to S$6.6m. Super Group’s Branded Consumer sales into other geographical markets went unchanged at S$7.1m.

The company ended the quarter with annual manufacturing capacity for various food ingredients as shown below:

Food Ingredient Annual Manufacturing Capacity
Spray-dried coffee 15,000 metric tonnes (mt)
Freeze-dried coffee 1,500 mt
Cereal flakes 4,000 mt
Creamers 125,000 mt

The company’s balance sheet had improved compared to a year ago as cash on hand increased from S$74m to S$89m while total debt remained unchanged at zero.

What’s next for Super Group

The company had introduced its new corporate logo and identity on 10 Jan 2013 and it “will continue to roll-out advertising and promotional campaigns in some of [its] key markets.” Super Group’s management “believes that the rebranding initiatives will help [it] to stay relevant to the consumers and enhance [the company’s] position as a leading brand in competitive Asia markets.”

So, investors might expect to see higher operating expenses in the coming quarters in support of this promotional effort.

The company also warned of competitive market conditions and fluctuations in raw material costs which might negatively impact its operations. Nonetheless, management “is familiar with these challenges and will take appropriate actions to mitigate their impact on [the company’s] business.”

Super Group also has a Botanical Herbal Extracts facility that’s in progress and slated for completion by the end of this year, according to its earnings release for the fourth quarter of 2012. The facility would bring with it new Food Ingredient products.

Super Group has been a solid market beater over the past five-odd years since the start of 2008. The company’s shares have gained 420%, way ahead of the Straits Times Index’s (SGX: ^STI) 8% decline in the same period.

Much of that could perhaps be traced back to Super Group’s earnings growth, where its profits have increased by 240% from S$29m in 2007 to S$99m in the last 12 months.

That profit growth, in turn, was driven by steady increases in Branded Consumer sales, as well as explosive growth in the sales of the Food Ingredients segment. In 2009, revenue from the latter came in at S$31.2m; in the third quarter of 2013, quarterly revenue from the Food Ingredients segment stood at S$46m.

So while Food Ingredients has been growing really quickly, signs are it’s begun to slow down. Can the company’s sales-growth pick up once the new Botanical Herbal Extracts plant comes online? More importantly, will the company’s profits be able to continue growing at the double-digit growth rates that it has done over the past few years? Those are some questions for investors to ponder.

Valuation

The market doesn’t seem pleased with Super Group’s results as its shares are down by 4.8% to S$4.15 at the time of writing. At that price, its shares are valued at 23 times trailing earnings and carry a dividend yield of 1.7% based on its pay-out last year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares of Super Group.