Super Group

Super Group: share price had recovered some 20% since Maybank-KE’s upgrade from Sell to Hold in November 2014. Despite signs of strength, we are unexcited over short-term prospects as positives are mostly priced in and there are two major hurdles to cross.

We reiterate our belief that prices had bottomed out in 3Q14 and Super is now in the early stages of demand recovery in all its major markets. However, currency weakness may weigh on earnings while higher taxes may check its earnings growth.

MYR has been exceptionally weak against SGD, the reporting currency. During 4Q14, MYR depreciated 2.8% against SGD and from Sep14 to Feb15, MYR depreciated more than 8% against SGD. Meanwhile, operating costs were higher after sugar and fuel subsidies cuts in 2013, and sales in its core overseas markets - Singapore, Thailand and Myanmar - grew only by low single digits y/y.

Back in Malaysia, a new 6% GST will come into effect in April, which puts Super in a dilemma. In an industry where the price elasticity of demand is high, passing on the costs to customers could bring about a backlash if competitors do not. Yet, margins will be substantially pinched if the new tax is absorbed.

We note, however, that Super’s products may qualify for GST-exemption, subject to clarification.

Looking ahead, the prospects are brighter as demand turnaround is anticipated in all its overseas core markets. The Thai economy has rebounded, Myanmar’s currency has stabilized and Singapore sales have started to grow again after the completion of relocation of a packaging plant.

In its upcoming earnings announcement, we expect 4Q14E revenue of $140.5m (-8% y/y) and core net profit of $17.4m (-23%), gross margins to rebound to 37.5%m from its 3Q14 trough of 32%, and FY14E revenue of $526m (-6%) and core net profit of $60m (-29%). In addition, we expect revenue growth for branded consumer goods to stop declining in 4Q.

For FY15E, we forecast mid-single digit growth in all its segments and markets.

Super is valued at 15x FY15E P/E based on its five-year historical mean, TP $1.02 and rated Hold pending greater clarity on Malaysia’s GST introduction.