The Motley Fool

What is Brewing this “Super” Company’s Rise and Fall?

Super Group Ltd. (SGX:S10) has been a multibagger over the past five years. From 1 January 2009 to its closing price last Friday on 22 August 2014, it has made capital gains of 535%.

By comparison, the total returns of the STI ETF (SGX:ES5), a proxy for the Straits Times Index (SGX:^STI), was 90.9% for the same duration.

However, Super Group’s share price has not been so hot lately.

Specifically, from its split-adjusted high of around S$2.50 in August 2013, it has taken a tumultuous fall of more than 40% to close at $1.35 last Friday. When a share falls by such an extent after a really strong climb, a good follow-up question would be: Is there a clear business-related reason for its rise and subsequent drop?

Let’s take a closer look what is behind the curtain.

A longer term five year look

On a broad basis, Super Group’s business is split into its Branded Consumer (BC) segment and Food Ingredients (FI) segment. The BC segment mainly consists of its instant beverage brands such as Super, Owl, Super Power, and many more. The production and sale of soluble coffee powder and non-dairy creamer meanwhile makes up the bulk of the FI segment.

Over the past five years, the BC segment has grown its top-line by a respectable 38%. However, the FI segment has done even better – albeit from a lower revenue base. The FI segment’s revenue has grown by 518% in the same time-frame to make up 35% of Super Group’s total revenue for 2013. The chart below shows the revenue growth for both segments in the last five years.

Source: Company reports (dollar units in ‘000)

Suffice to say, the company has benefitted from its moves within the FI segment. The increase in revenue was particularly pronounced in 2011 and 2012 when the increased capacity for its non-dairy creamer facility in Wuxi, China, came online.

A shorter term quarterly look

When we zoom into a more granular quarterly look, the patterns become fuzzier. It would seem like the revenue from the FI segment tends to be better in the second half of the financial year (compared to the first half), while the revenue for the BC segment tends to seasonally peak either during the fourth quarter or the first quarter of the year. The nett effect is for different segments to drive growth at different quarters.

To be sure, possible reasons for the volatile quarter to quarter revenue levels include product streamlining and new product launches in different markets during the year.

Besides that, there is perhaps less we can conclude from this view.

Source: Company reports (dollar units in ‘000)

Foolish take away

Foolish investors may do well to keep their focus on the longer term reasons for owning Super Group and worry less on the volatility of quarterly earnings. To be sure, this is does not mean that we cast aside the challenges it faces. My colleague Stanley Lim has certainly pointed out a few credible threats to Super Group’s business recently.

Speaking of the long term view, the one key development to watch might be the growth of the company’s branded consumer segment. This is listed as part of Super Group’s three-prong strategy here.

The reason is this – if Super Group is able to develop a strong brand over time, this may count towards a durable competitive advantage that it can own over decades. In particular, that advantage is the branding trait Charlie Munger (Warren Buffett’s successful sidekick) refers to as the informational advantage:

“The informational advantage of brands is hard to beat. And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz’s chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don’t know anything about Glotz’s. So if one is $.40 and the other is $.30, am I going to take something I don’t know and put it in my mouth – which is a pretty personal place, after all – for a lousy dime? So, in effect, Wrigley, simply by being so well-known, has advantages of scale – what you might call an informational advantage.”

So, if Super Group is to gain this advantage in its branded goods segment, it might turn out to be a company which an investor can own for the very long term. Of course, that’s a very big if which different investors can have different answers to.

Stay tuned for more insights in the weeks to come as I look into the company’s geographical revenue contributions.

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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 Chin Hui Leong owns shares in Super Group.