Is Russia Super Group Ltd’s Next Growth Opportunity?

In Super Group Ltd’s (SGX: S10) 2014 Annual Report, released on 10 April 2015, the company said that it plans to expand its business beyond Asia to other regions such as Eastern Europe, the Middle East, and Africa.

Last week, Super Group had done just that – the instant food & beverage (F&B) brand owner announced that it will be setting foot into Russia. Super Group currently has a strong market presence  in Southeast Asia in the instant F&B segment (think instant coffees and teas).

In the announcement, which was made last Friday, Super Group revealed that it has “entered into a joint venture [JV] agreement with a non-related Russian individual, Mr Krekhanov Kirill Anatol’evich,” to distribute instant tea and coffee beverages in Russia under the Golden Eagle brand.

Golden Eagle, a brand deemed to be worth US$5 million by both Super Group and Anatol’evich, is controlled by Anatol’evich under the name of SmartPort Zapad.

The 50-50 JV will see Super Group, through a wholly-owned subsidiary, cough up US$2.5 million to take up a 50% equity interest in SmartPort Zapad. The remaining 50% will be held by Anatol’evich and his controlling parties.

Super Group’s investment will be broken up into two tranches as follows:

  1. A payment of US$208,000 in cash; and
  2. A balance payment in the form of manufactured instant coffee drinks packaged under the Golden Eagle brand

Another interesting aspect of the agreement is that Super Group would also “grant an additional USD1.0 million credit line to [SmartPort Zapad] for the supply of instant tea and coffee beverages to [Smartpart Zapad]. [Super Group] would be entitled to a 50% dividend if [SmartPort Zapad’s]’s profit exceeds USD15.0 million or within 5 years, whichever is earlier.”

The investment by Super Group is in line with the company’s strategy to constantly seek out complementary businesses in its coffee, non-dairy creamer, and tea-related food products and to widen its distribution network geographically. Super Group intends to fund the investment using internal resources and this brings me to the firm’s financial strength.

A glance at the company’s latest financials (as of 31 December 2014) would reveal that it has a total cash hoard of around S$101 million on its balance sheet while carrying just S$20 million worth of borrowings.

By investing very prudently into this new JV (the investment amounts to just US$2.5 million), Super Group’s management can test out waters in a new market while leveraging on another brand that already has a foot in Russia. If the JV doesn’t work out, it’s “just” US$2.5 million that’s wasted but if it works out well, it could propel the company to greater heights. In fact, the actual cash outlay for the JV is very small, at just around 8%, of the total investment (a US$208,000 payment, as mentioned earlier).

Currently, things are not so rosy in Russia due to a contracting economy and the political uncertainties in the Eastern European region. One of Super Group’s industry peers in the Eastern Europe instant coffee and tea market would be Singapore-listed Food Empire Holdings Limited (SGX: F03).

For the fiscal year ended 31 December 2014, Food Empire reported a net loss of US$13.2 million; in 2013, the company had posted a profit of US$11.7 million. The red ink spilled by Food Empire came on the back of a huge depreciation of the currencies of the company’s two biggest markets, Russia and Ukraine, against the US dollar (Russia and Ukraine are still embroiled in a territorial conflict), which is the firm’s reporting currency.

Super Group’s entry into Russia amid the current turmoil seems to be opportunistic. Billionaire investor Warren Buffett once quipped that investors should “be greedy when others are fearful”. When people are fearful, that’s when the biggest bargains can be had.

Super Group closed at S$1.49 last Friday and is trading at 24 times its historical earnings at that price.

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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.