1 Reason To Be Optimistic About Super Group Ltd

Super Group Ltd (SGX: S10), best known for its instant coffee products, has had a rough 2015 so far. Amongst the uncertainty, however, may lie opportunity.

But first, the bad news. Revenue has declined by 5% year-on-year for the first nine months of 2015. Lower sales has lead to Super Group’s profit falling by a hefty 26% over the same period. The weak performance has not gone unnoticed: Shares of Super Group have declined by nearly a quarter since the start of 2015.

With that out of the way, let’s touch on the reasons to be optimistic as we sift through the wreckage. Here’s one.

The bright spot in a dark alley

Despite the downturn in revenue, Super Group’s operating cash flow has held up fairly well so far. This is an important note for what comes next. Capital expenditures have declined significantly in the past two quarters and the trend is set to continue in the coming quarters.

When we deduct capital expenditure from a company’s operating cash flow, we get free cash flow (FCF).

Super Group’s lower capital expenditure has lead to higher FCF. In fact, Super Group generated $23.6 million in FCF in the first nine months of 2015; this is a substantial improvement from the $1.1 million in FCF that was seen last year.

super group fcf ofc

Source: Super Group’s earnings releaset; OCF: Operating cash flow, Capex: Capital Expenditure.

Furthermore, as I already mentioned, it is possible that the lower capital expenditure may continue into the future.

Earlier this year, Super Group’s management team commented that the company’s capital expenditure is expected to moderate to between $4 million to $5 million per annum. The company also commented that the expansion plans undertaken in the past few years should be able to meet its needs up till 2017.

Foolish summary

In the past quarter, Super Group has released new products such as ESSENSO, an instant microground coffee beverage, and Owl Kopitiam Roast, new range of kopitiam-styled coffee. Over the long term, it may be important for Super Group to keep innovating and bringing new products into the market.

The tough operating environment may continue for a while, but Super Group’s higher FCF gives the management team financial options to invest for its future.

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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