Taking profit. Super’s share price has risen by 6% YTD against the STI which has slipped by 13% during the same period. While we are still optimistic on the group’s long-term prospects, we believe this is the right time to take some profit off the table as we discern possible speed bumps ahead.
Lacklustre 3Q11 results. Overall revenue growth of 23% YoY masked the fact that branded consumer sales was up only 4% YoY. With price hikes of 6% YTD, this implied that sales volume was worryingly flat. The weakness was attributed to lower sales in Thailand, a key market making up 30% of Super’s branded consumer sales. Even on a YTD basis, we estimate that gross profitability for branded consumer sales has declined.
Margin optimism overdone. The market may be too optimistic on margins as Super transits from pure consumer sales to duo contribution. During 2008-10 when there were no third-party ingredients sales, gross margins averaged 35%. With increasing revenue from this segment going forward, overall gross margins may not hit market expectations of 33-35% even if raw material prices were to retreat.
Pricing power a test of brand equity. The lack of volume growth in the branded consumer division is more worrying in the light of Super’s recent pricing decisions. This year, Nestle has increased prices in similar markets by about 10-12% to pass on higher costs, stretching its premium over Super to about 15%. In essence, Super is absorbing higher raw material prices to win market share. This may be a part of its longer-term strategic plans but we doubt whether Super’s brands have sufficient pricing power.
Downgrade to HOLD. We revise our estimates, taking into account the Thai floods whose impact will likely be felt in the next two quarters. Our recurring net profit excludes deferred gains of $3m a year from 2007’s property sale (ending FY13). Our target price of $1.485 is pegged at 15x FY12F.
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