Maintain HOLD with a lower target price of S$1.59. Entry price: S$1.35.

&bull Company update. We spoke with the management of Super Group (Super) recently.

 

&bull Expect a challenging 2Q14. The group is expected to release its 2Q14 results in August. We think conditions remain challenging in its key markets, such as the political unrest in Thailand (30% of total consumer branded turnover) and stiff competition in Indonesia (less than 5% of total consumer branded turnover). In addition, cost of raw materials, such as coffee (Robusta) was up 12% ytd, which more than offset a 1-5% ytd decline in sugar and crude palm oil (CPO) prices.

 

&bull Initiatives in branded consumer segment. 

 

 

 

&bull Rebranding and product innovation to be medium-term drivers. In the medium term, Super&rsquo s focus for the branded consumer segment will be rebranding and product innovation. We view these two areas are critical in the face of dynamic consumer preferences with intensifying competition in markets, such as Myanmar, Philippines and Indonesia. For the food ingredient (FI) segment, Super is penetrating new markets, such as the Middle East and Europe.

 

&bull Importance of product innovation in FI segment. The 6% yoy fall in FI revenue has also led to investors questioning the growth outlook for this segment. In addition, there were also concerns that the commodity nature of the segment could see lower-tier customers (whom we think account for close to half of FI turnover) switching to cheaper alternatives. We believe management has taken adequate steps to address some of these issues by working closely with top-tier clients in R& D. In addition, Super is constantly focusing on product innovation and an example would be new offerings, such as nutritional oil powder (NOP). In our view, the group&rsquo s emphasis on product innovation would raise the entry barrier to this segment, which tends to be less price-sensitive.

 

&bull Longer-term pricing power from brand building. Although we understand that Super does not plan to raise prices in tandem with its current rebranding exercise, we think its longer-term pricing power would be enhanced. This is because the rebranding exercise will build brand loyalty and brand awareness, particularly with the younger consumers. This is critical, particularly for the China market where coffee consumption is primarily targeted at the young and affluent segment.

 

&bull No change to our estimates pending 2Q14 results. We had cut 2014-15 net profit forecasts after the weak 1Q14 results. On our estimates, the group is expected to register a 3-year EPS CAGR of 9%. Despite expectations of a weak 2Q14 performance, we believe this has been partially reflected in the 23% ytd decline in Super&rsquo s share price. Key risks, in our view, are: a) raw material prices, b) irrational competition in both the FI and branded consumer markets, and c) sales execution risks in China.

 

Technical Analysis