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Can Super Group Be The Next Big Winner?

There are those who cannot live without at least a cup of coffee each day. For them, Super Group’s (SGX: S10) bevy of instant coffee products under the brands of Super and Owl, among others, might be a familiar sight.

Over the past decade, the company has been adept at capturing the public’s taste for instant beverages and snacks and turning them into fuel for corporate growth; sales and profits have been growing at compounded annual rates of 14.5% and 24.5% respectively between 2003 and 2013.

That level of performance has also elevated its shares into one of the rare few in Singapore’s stock market that have gone on to deliver total returns in excess of 1,000% since the start of 2004. Back then, Super Group’s shares were worth a dividend-adjusted price of S$0.2935 and today, it’s 1,092% higher at S$3.50.

In contrast, the broader market, as represented by the Straits Times Index (SGX: ^STI), has managed to gain only 81% to its current level of 3,198 points. Given its market-beating performance thus far, can Super Group continue delivering returns to shareholders?

That’s honestly a tough question to answer. But fortunately, a useful checklist from super investor Peter Lynch’s book One Up on Wall Street might be able to help give us some direction.

1) The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry?

Currently, the Straits Times Index is valued at roughly 14 times trailing earnings, which is a fair bit lower than the PE ratio of 19.5 for Super Group.

Given Super Group’s businesses (the sale of branded consumer products such as instant coffee, tea, and snacks in addition to the sale of food ingredients to third-party beverage manufacturers), some directly- or tangentially-similar companies operating within the same industry can include Thai Beverage (SGX: Y92), Yeo Hiap Seng (SGX: Y03), and Food Empire Holdings (SGX: F03).

Company

Price

Trailing PE ratio

Thai Beverage

S$0.59

20.1

Yeo Hiap Seng

S$2.32

15.2

Food Empire Holdings

S$0.415

15.0

Source: S&P Capital IQ

From the figures above, we can see how Super Group has a PE ratio that’s on the higher-end of the scale in relation to both the market and its peers.

2) What is the percentage of institutional ownership? The lower the better.

One of Lynch’s primary reasons for including this criterion was because companies that flew under the radar of institutional investors (big money managers) tended to offer better bargains as they would be less well-known in the market.

On that front, Super Group’s latest 2012 annual report showed that as of 12 March 2013, the only institutional investor that owned a meaningful block of the company’s shares was The Capital Group Companies Inc. with a 9% interest.

While the investor’s interests in Super Group may or may not have changed since then, it does seem that Super Group’s shares are not exactly widely-held amongst institutional investors even if it isn’t exactly unknown. There’s another plus point for Super Group as well. Its founding members, David Teo Kee Bock,Te Lay Hoon (wife of Teo), and Te Kok Chiew (brother of Te), collectively controls around one third of the company. So, insiders certainly do hold a huge chunk of shares.

3) Are insiders buying and whether the company itself is buying back its own shares?

Over the past three months, there has been no buyback activity from both the company and its insiders.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

As mentioned earlier, Super Group’s earnings have grown by 24.5% per year on average since 2003. Along the way, there has only been one year where its earnings have declined. So, the company’s earnings and growth has been consistently strong.

Year

Earnings per share
(SG cents)

Year-on-year change

2003

2.63

2004

3.77

43%

2005

4.72

25%

2006

4.98

5%

2007

5.45

9%

2008

4.64

-15%

2009

7.48

61%

2010

10.7

42%

2011

11.1

4%

2012

14.2

28%

2013

17.9

26%

Source: S&P Capital IQ

5) Does the company have a strong balance sheet?

Super Group ended 2013 with a strong balance sheet carrying S$98.5 million in cash with zero debt. In fact, the company has been in a really strong net-cash position (where total cash on hand exceeds total debt) going back to at least 2008. So, that’s a ‘yes’ to this criterion from Lynch.

6) Does the company have room to grow?

According to projections from research outfit Euromonitor International, the Southeast Asian market for instant-coffee is estimated to hit US$4 billion (around S$5.04 billion) in 2017. Given Super Group’s South-East Asian focus for its instant beverage business and its current revenue of ‘only’ S$309 million from that segment in that region, it would appear that there’s some significant run way for growth. But of course, that’s assuming the company can withstand fierce competition from other international rivals like Nestle and Kraft Foods.

While its instant beverages segment has been chugging along nice, one of the pillars of Super Group’s growth in the past 4-5 years has been its Food Ingredients segment where it sells products like soluble coffee powder and non-dairy creamer to other beverage manufacturers.

While growth in that segment has been really fast – revenue from the segment has more than tripled from S$58.3 million in 2010 to S$192.5 million in 2013 – the company seems keen to drive even more growth there by entering new markets in Europe and the Middle East; core markets for the Food Ingredients segment has generally centred around South-East Asia and China. The initial signs are promising, given how revenue from the segment has jumped by some 2,185% in 2013 in its new growth markets. In addition, there are new products (like Botanical Herbal Extracts and Liquid Glucose Syrup Solids) and an expansion in capacity for existing products to look forward to.

In light of all the above, it does seem that there’s room for the company to continue growing.

Foolish Bottom Line

To sum it up, Super Group scores well on Lynch’s checklist on a few fronts: 1) It has low institutional ownership; 2) consistent profitability and growing earnings; 3) a clean, debt-free balance sheet; and 4) large headroom for growth.

However, as useful as Lynch’s checklist is, that still isn’t enough to determine if Super Group can indeed be a market-beater going forward. There are other important questions investors have to think about. Examples include the company’s competitive position in relation to its peers in the branded consumer market, as well as management’s innovative and operational capabilities in carving out new markets for new products.

Only when those and more are answered, can a definite answer appear regarding Super Group’s ability to be a market-beating share in the years ahead.

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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 writer Chong Ser Jing owns shares in Super Group.