The Reason Behind Super Group’s 48% Fall In Price Today

For investors who were browsing Yahoo! Finance’s pages for Super Group’s (SGX: S10) latest share price, they might have been shocked. As of the time of writing (26 May 2014, 3:15pm), the instant beverage maker’s shares have ‘fallen’ by some 48% to S$1.485, according to the investing portal. What has prompted such a drastic decline?

Much ado about nothing

Turns out, nothing has changed with the company – or even its share price. On 24 Feb 2014, Super Group had proposed to issue one bonus share for every existing share. In the process, the company’s share count would have effectively doubled, without any pertinent change being made to its underlying business value.

As it just so happens, today’s the day where Super Group’s shares went ex-bonus (i.e. the day when the bonus shares are supposedly given out). And with that, shares of the instant beverage maker should be halved to a split-adjusted price of S$1.43 from its close at S$2.86 last Friday.

Investors looking at just the headline figures on financial portals – showing a 48% decline – shouldn’t be alarmed as nothing untoward has happened to the company between last Friday and today. In fact, at its current price of S$1.485, there’s even been a 3.8% gain from last Friday’s close.

But in any case, this price ‘decline’ shouldn’t be the real focus for investors. The real concern should be with the company’s business.

A history of growth

Between 2003 and 2013, Super Group’s business had grown at a breath-taking pace. Revenue jumped by 286% from S$144 million to S$557 million while the company’s earnings per share had grown by 581% from S$0.026 to S$0.179.

Prior to 2008, the company’s growth had been predominantly driven by the sale of instant beverages like coffee and tea under brands like Super and Owl. Sales at the company had grown from S$144 million in 2003 to S$254 million in 2007 with the help of those brands, translating into a compounded annual growth rate of 15.2% for those four years.

Since 2008, a new business segment – Food Ingredients – had appeared to drive the company’s growth further. Under the segment, Super Group sells ingredients like non-dairy creamer and soluble coffee powder to other beverage manufacturers. In 2007, the segment accounted for merely 1% of the company’s total revenue of S$254 million. By 2013, the Food Ingredients segment had accounted for 34.6% (or S$193 million) of Super Group’s overall revenue of S$557 million, growing some 17% in that year alone.

Meanwhile, the Branded Consumer business had slowed noticeably, with sales growing at a compounded rate of 6.6% per year between 2008 and 2013. While that’s slower than in previous years, that’s still growth at the very least.

Disappointment sets in

Super Group’s latest results for the first quarter of 2014 though, have turned the growth story on its head. Both its Branded Consumer and Food Ingredients business had suffered 6% year-on-year declines in quarterly sales, dragging its profits some 19% lower to S$18.6 million. Rising commodity prices (think coffee and sugar) in addition to recent civil unrest in Thailand had caused the company’s business to suffer. Thailand is one of Super Group’s core markets, accounting for around 30% of the company’s Branded Consumer segment.

With this decline in both top- and bottom-line, shares of Super Group have been clobbered of late, dropping by 42.4% from its all-time-high of S$2.485 (split-adjusted) on 13 August 2013 to S$1.43 last Friday. In comparison, the Straits Times Index (SGX: ^STI) has actually inched up by 1.0% to 3,278 points in the same time frame.

At its split-adjusted all-time-high of S$2.485, Super Group’s shares were selling for some 27 times trailing earnings. That’s the sort of valuations that are awarded to market-darlings with high prospects for growth and is also a big reason for the company’s share price tumble that came on the back of disappointing first quarter earnings.

What’s next for Super Group?

So, can the company ever recover? A difference in opinions is what makes a market so there’d be plenty of strong voices on both sides of the divide. But as it is, no one can say for sure though it might be worthwhile pointing out two sources of strength with the company that might just see it tide over its current difficulties: 1) the company has ample financial resources (it has S$94.7 million in cash with only S$0.5 million in debt); and 2) the company has had a history of innovation with coming up with new businesses with the growth of its Food Ingredients segment being one example.

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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.