Super Group is at a 52-Week Low: Opportunity or Time to Flee?

The aroma from the Super Classic Charcoal Roasted White Coffee is tantalizing my senses – I had just made myself a cuppa joe to keep me awake throughout the day. And for me, there’s no better instant coffee than the ones from Super Group (SGX: S10).

Unfortunately, even though Super’s instant coffee might be very enjoyable for some, the company’s share price movement of late has been anything but.

Currently, shares of Super are going at S$1.355 apiece, just a tad bit higher than its 52-week low of S$1.35. This also translates into a 47% fall from Super’s 52-week high of S$2.525 that was seen last August.

Year-to-date, the stock is down 30%. Comparatively, Singapore’s share market in general, as represented by the Straits Times Index (SGX: ^STI), is up 3% for the year. What has caused Super’s fall from grace? But before we delve into that, let’s take a look at what the company’s business entails.

Super is a leading instant food & beverage brand owner and has a strong market presence in Southeast Asia (SEA). For instance, it has a market share for instant beverages of around 45% in Myanmar.

The firm operates in two main business segments – Branded Consumer (BC) and Food Ingredients (FI). The BC segment takes care of the sale of instant coffee mixes, instant tea, cereals, etc. Under the segment, the company owns brands such as Super, Owl and NutreMill, among others. Meanwhile, the FI segment is involved in the manufacture of various beverage-ingredients for sale to other beverage manufacturers.

Falling knife, scalding coffee

One of the main reasons for Super’s pitiful share price performance is its poor first quarter result that was released about a month ago. During the quarter, total revenue fell 6% year-on-year to S$124.6 million on the back of 6% drops in sales for both the company’s BC and FI segments.

The BC segment had suffered due to lower sales in Southeast Asia, most notably in Thailand as a result of civil unrest in the country. The Land of a Thousand Smiles is the largest BC market for Super, accounting for almost 30% of the segment’s sales. In Thailand, Super’s distributors and wholesalers had held back on stocking activities amid poorer consumption and social unrest. Meanwhile, the FI segment’s revenue drop had happened due to slower sales in Southeast Asia, especially in the Indonesian market.

Around a week after the release of Super’s first quarter result, the Thai military launched a coup in Thailand, causing more fear amongst investors. The troika of 1) dismal first quarter results, 2) the military coup, and 3) high valuation of Super’s shares to begin with (at Super’s 52-week high, it was selling for almost 30 times trailing earnings), have been major factors contributing to its poor share price performance.

So, to reiterate the question asked in the title of this article: Is this an opportunity for interested investors to get a bite of the company or should investors flee and never look back?

To answer that, investors should first ask if the company is going through a short-term problem or have its business-fundamentals turned for the worst, permanently. Here’s some food-for-thought on the topic.

Who wants discounted coffee?

The civil unrest in Thailand happening at the moment is beyond the control of the company. But, military coups are a common occurrence in Thailand and the country has done fine in the grand scheme of things. When the latest political crisis in Thailand cools over, is it reasonable to expect sales of Super’s products in Thailand to pick-up when consumer demand rebounds?

At a current trailing price-to-earnings (PE) ratio of around 16 and a dividend yield of 3.3%, investors should also ponder if Super’s valuation makes sense. In fact, the average PE ratio of Super’s peers is around 25, more than 9 points higher than the company’s.

Furthermore, at 16 times its earnings for the last 12 months, an investor is buying into a capable management team, a well-known brand that was valued at US$150 million in 2013 (a value that’s not reflected in the company’s balance sheet) and future growth drivers.

Yes. There are future growth drivers as Super’s not resting on its laurels. Some of these drivers include the opening of new production facilities such as those for botanical herbal extraction and production of liquid glucose syrup solids and nutritional oil powders. These new facilities are scheduled to come online between the second half of 2014 and 2015. These businesses are classed under Super’s FI segment and for an idea of how fast management has scaled that part of its business, consider this: FI sales were a mere S$3 million in 2007; by 2013, sales had ballooned to S$192 million.

Foolish Bottomline

The father of value investing, Ben Graham, has been quoted as saying that in the short-term, the stock market behaves like a voting machine, but in the long-term it acts like a weighing machine. In the short-term, the market is punishing Super for its recent troubles – its year-to-date share price performance is a testament to that fact. But, there’s a chance that things aren’t as dire over the long-term with the company. It’s up to you to decide if my last statement is valid.

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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 Sudhan P owns shares in Super Group.