2010 apr 30 - cimb - super coffeemix

April 30, 2010

See important disclosures at the end of this publication 1

OSK Research DMG Research

SINGAPORE EQUITYInvestment Research

Initial Coverage Private Circulation Only

CONSUMER

BUY Initiate

Price S$0.815

Tan Han Meng, CFA, CPA +65 6232 3839 [email protected]

SUPER COFFEEMIX MANUFACTURING Target S$1.10

Terence Wong, CFA +65 6232 3896 [email protected]

Higher payouts or M&A as cash grows

Stock Profile/Statistics

Bloomberg Ticker SUPER SP STI 2959.01 Issued Share Capital (m) 537.74 Market Capitalisation (S$m) 442.17 52 week H | L Price (S$) 0.85 0.43 Average Volume (3m) ‘000 1089.48 YTD Returns (%) 27.34 Net gearing (x) Cash Altman Z-Score 4.82 ROCE/WACC 1.67 Beta (x) 0.72 Book Value/share (S¢) 0.52 Major Shareholders Goi Seng Hui 16.80% Te Lay Hoon 12.57% Teo Kee Bock 12.11% Te Kok Chiew 10.00% Share Performance (%) Month Absolute Relative 1m 8.7 7.8 3m 26.4 20.0 6m 21.6 11.0 12m 79.1 17.0

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(S$)

6-month Share Price Performance

Re-discover a Super brand; Initiate with BUY. Established in 1987, Super Coffeemix Manufacturing (Super) is Singapore’s leading instant beverage group that commands ~11% market share in its key S$1.4b market, consisting of Singapore, Malaysia, Thailand and Myanmar. Super owns >10 brands. including Super, Owl and Café Nova, and offers 300+ products across 52 countries worldwide. Despite its resilience and high cash generative characteristics, current share price trades at early cycle valuation of 9x FY10E PE and offers a dividend yield of 4-5%. Initiate with BUY and TP of S$1.10, representing an upside potential of 35% over the next 12 months. High cash generative characteristics. Super has emerged stronger from recent economic turmoil. Revenue and recurring net profit grew at an average of 8% and 22% per annum over 2007-09 respectively, on the back of strong contribution from its new ingredient sales division and margin expansion. Free cash flow generated in FY08 and FY09 were S$12m-S$60m (vs. recurring net profit of S$30m-S$38m) respectively. Following the divestment of its non-core assets in 1Q10, Super is likely to have a current cash balance of around S$120m,representing 30% of its market capitalisation. We believe this will result in higher payouts or M&A in the near future. Potential upside catalysts. Super will continue to benefit from the region’s GDP growth and the current low Robusta coffee prices, which suggest above historical average margins in FY10E. The counter has attracted attention from the investment community since the announcement of its TDR dual-listing plan. We expect share price to respond positively to quarterly earnings momentum, its dual-listing in Taiwan in 2H10 and potential M&A news flow. Downside risks. Key risks include unexpected sharp increases in raw material prices, delay in listing plans and potential M&A overpayments.

FYE Dec (S$’m) 2008 2009 2010E 2011E 2012E

Revenue 300.2 296.3 335.3 384.0 425.9

Gross Profit 99.8 103.4 134.8 153.8 171.8

Net Profit 25.1 40.2 64.4 55.2 59.6

Net Profit - Recurring 30.3 38.3 50.8 55.2 59.6

P/E (x) 14.6 11.4 8.6 7.9 7.3

P/B (x) 1.7 1.5 1.3 1.2 1.1

EV/EBITDA (x) 9.4 7.8 5.0 4.3 3.5

Dividend Yield (%) 2.0% 3.2% 4.8% 4.2% 4.5%

ROE (%) 12% 14% 16% 15% 15%

Net Gearing (%) -6% -23% -42% -41% -43%

Source: DMG estimates

See important disclosures at the end of this publication 2 DMG Research

TABLE OF CONTENTS

About the Company 3

Discussion 4

Forecast 6

Valuation and Downside Risks 7

Financial Tables 9

Disclaimer 10


OSK Research DMG Research

ABOUT THE COMPANY

Background

Super Coffeemix Manufacturing (Super) was founded in Singapore in 1987 by Mr Teo Kee Bock, Mr Te Kok Chiew and Ms Te Lay Hoon. Its principal activities are manufacturing and managing its own brands of instant beverages and food products. Super was listed on Sesdaq in July 1994 and upgraded to the Mainboard in February 1998. Currently, Super is preparing for the listing of Taiwan Depository Receipts (TDRs) representing an aggregate of up to 30m new ordinary shares in the company on the Taiwan Stock Exchange (TSE). The new issuance may lead to an EPS dilution of not more than 5.2%. As TDRs are non-fungible in nature, there will not be arbitrage opportunity between Super’s TDRs and ordinary shares. However, should the TDR listing go through, Super will have another equity fund-raising channel going forward.

Figure 1: Board and Major Shareholders

Board Designation No. of Shares ('m) % Teo Kee Bock Chairman/ MD 65 12.11% Goi Seng Hui Vice Chairman/ Non-exe director 90 16.80% Te Lay Hoon Exec director 68 12.57% Te Kok Chiew Exec director 54 10.00% Other Major Shareholders YHS Investment 65 12.10% CIM II Limited 39 7.30% Total Number of Shares 538

Source: Company 2009 AR

Product

Super has 300+ products ranging from instant coffee, cereals, canned drinks, instant noodles to non-dairy creamers. These products are sold under its own brands including Super, Owl, Café Nova, Super Power and Coffee King. Revenue breakdown by its two key divisions is Branded Consumer Goods – coffee (67%), cereal (9%), and others (13%); Ingredient Sales – non-dairy creamer (7%) and soluble coffee powder (3%). Production facilities

Super operates 13 manufacturing facilities in Singapore, Malaysia, China, Myanmar and Thailand. Its facilities are ISO9001, ISO22000 and HACCP certified, and have a combined annual production capacity of 10,000 tonnes for soluble coffee and 50,000 tonnes for creamers. Currently, it is the only company in the region with manufacturing capabilities for instant soluble coffee, cereal flakes and non-dairy creamer. Average inventory turnover is around 120 days. Customer

Super distributes its products directly or through 3rd

party distributors to 52 countries worldwide. Its key markets are Singapore (est. 12% of revenue), Malaysia (13%), Thailand (30%), Myanmar (16%) and China (12%), based on its receivables breakdown. Average trade receivables turnover is around 80 days.

Suppliers

Raw materials include robusta coffee bean, sugar, and palm oil, which collectively make up 75% of its cost of goods sold. Other cost components include packaging (15%) and overhead (10%) costs. Average trade payables turnover is around 50 days.


KEY POINTS

Industry Dynamics The instant coffee industry in Asia is relatively matured and dominated by a few key MNC players (e.g. Nestle and Sara Lee) and local ones (e.g. Super and Aik Cheong). While a stable demand for instant coffee has provided support for industry growth, competition is intense and companies have to invest heavily on new innovations to broaden product range or rejuvenate existing ones so as to gain or sustain their market shares. In addition, many of them have ventured into new markets to seek growth opportunities. Revenue Growth Driven by New Products, Markets and Uses Super’s 2006-09 growth was driven mainly by a) launch of new products, b) entrance into new markets and c) introduction of new uses. New products launched in 2007 include the “Super Power” and “Ipoh White Coffee” series, which are followed by extension of product lines e.g. “reduced sugar” and “no-sugar” variants. Super has also ventured into new markets such as South Africa, extending its reach to 52 countries (2004: 30+) worldwide. Product innovation and market expansion are estimated to account for around 60% of revenue growth during the period. In a similar practice adopted by international branded players that ventured into private label manufacturing during tough times, Super leveraged on its manufacturing capabilities and started to supply ingredients to commercial users in 2008. The ingredient sales division currently makes up around 11% (FY06: 1%) of the Group’s revenue.

Figure 2: Key Revenue Growth Drivers - New Products, Markets and Uses

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S$'m

Figure 3: Divisional Sales and Growth Trend

S$’m Growth % FYE Dec 2006A 2007A 2008A 2009A 2007A 2008A 2009A

Total sales 211 254 300 296 20% 18% -1% BCG-Coffee products 157 192 193 199 23% 1% 3% BCG-Cereal products 21 24 27 27 17% 12% 1% BCG-Others 32 34 45 39 8% 31% -14% IS - Non-diary creamer 1 3 26 22 Nm Nm -16% IS - Soluble coffee powder 0 0 9 9 20% 18% -1%

Source: DMG estimates, Company


KEY POINTS

Strong Pricing Power Helped to Withstand Margins Pressure Super’s raw materials (robusta coffee bean, sugar and palm oil) make up 75% of cost of goods sold. Correlation between input costs and gross margin is estimated at -0.6. Our analysis suggests that Super enjoys relatively strong pricing power that allows it to pass on input cost increases to consumers. In FY08, raw material prices increased 35% but gross margin fell by a less-than-proportionate 1ppt to 33%. Flexibility in pricing helped to push FY09 gross margin to 35% (FY07: 34%), even though raw material prices remained above FY07 levels.

Figure 4: Raw Material Costs (6month lag) vs. Gross Margin %

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GM % (RHS) Robusta Sugar Palm Oil


Cash Flow Accretive Investments As part of its plan to streamline its operations and house F&B business under one roof, Super has recently divested its interests in two non-core businesses, namely Jiangsu Hengshun (a vinegar manufacturer) and Care Property (a property developer) and is likely to recognise a disposal gain of S$14m.

Figure 5: Performance of Recent Investments

Companies Year Cost S$'m Est. Gain S$’m Status

Owl Coffee 2003 6.0 Na To keep

Jiangsu Hengshun 2006 14.0 3.5 Sold in 1Q10

Care Property 2006 10.1 10.1 Sold in 1Q10

Sun Resources 2005 7.7 Na To sell

Tianjin Super Lifestyle Food 2007 3.5 Na Provision Source: DMG estimates, Company

High Net Margins on Tax Incentives Operating costs are relatively stable i.e. selling expenses are kept at around 13% of revenue, and administrative expenses hover around 11%. Due to various tax incentive schemes, Super enjoys effective tax rates of 6% (Singapore corporate tax: 18%) over the past two years, resulting in FY09 recurring net margin of 13% that is the highest since its listing.


FORECAST

In deriving our forecasts, we made several key assumptions, which are:

i. Consumers to remain cost conscious. Based on IMF’s estimates, Super’s key markets are expected to experience strong growth in 2010-11, providing support for instant coffee demand. However, we expect consumers to remain cost conscious in their purchasing behaviour, which will augur well for mass-market players such as Super.

Figure 6: Selected Countries’ GDP

Real GDP % Chg Est. Revenue

Countries 2008 2009 2010E 2011E Exposure

Singapore 1.4 (2.0) 5.7 5.3 12%

Malaysia 4.6 (1.7) 4.7 5.0 13%

Thailand 2.5 (2.3) 5.5 5.5 30%

Myanmar 3.6 4.8 5.3 5.0 16%

China 9.6 8.7 10.0 9.9 12% Source: IMF

ii. Low input cost to drive margin expansion. Average price of robusta coffee

bean of around US$1,400/ton over the past nine months (FY09: US$1,800/ton) provides margin visibility up to 3Q10. At US$1,400, gross margin is likely to trend above 40%. We expect current low inflationary environment to continue and gross margins to hover around 40% level over the next two years.

Figure 7: Raw Material Costs (6month lag) vs. Gross Margin %

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GM % (RHS) Robusta Sugar Palm Oil


iii. High Cash Generation. Based on our estimates, recurring free cash flow will

average around S$35m p.a. over the next three years. In addition, Super will likely have a cash balance of S$140m (w/o TDR), or S$165m (w/ TDR) by FY10. Although management has not disclosed details on its cash deployment plan, we believe it could come in the form of higher dividend payouts and potential M&A.


FORECAST

Net Profit Stress Test Our FY10E revenue and gross margin estimates are S$335m and 40% respectively. Our net profit sensitivity analysis suggest i) +1% in revenue will increase our net profit estimate by 3%, and ii) -1ppt in GM will shave it by 7%.

Figure 8: Net Profit Sensitivity Analysis (S$’m)

Revenue

152 -10% -5% 0 +5% +10%

42% 43 50 57 64 71

41% 40 47 53 60 67

40% 38 44 51 58 65

39% 34 40 47 53 60

Gross Margin

38% 31 37 43 50 56 Source: DMG estimates


VALUATION

At S$0.83, share price trades at 8.6x FY10E P/E, below its historical mean. Early cycle valuation is likely due to limited familiarity with the counter and hence, presents investors with opportunities for potential returns. We use forward PE as our preferred valuation methodology as share price will likely respond positively to earnings momentum. Our TP is pegged to its 8-year historical average of 11.3x FY10E. Our derived TP is S$1.10/share, which represents 35% upside potential on a 12-month horizon. Key risks to our estimates include unexpected sharp increase in raw material prices, delays in TDR dual-listing plans and M&A overpayments.

Figure 9: Valuation Comparison

Company Rating Price Mkt Cap

3m Avg P/E (x) P/B (x) Yield (%)

29Apr S$'m Vol S$m 09A 10E 11E 09A 10E 11E 09A 10E 11E

DEL MONTE PACIFIC NR 0.39 416 0.17 26.2 8.9 7.9 1.5 1.4 1.3 3.0 8.3 9.8

PETRA FOODS NR 1.12 596 0.02 17.2 15.3 10.2 2.0 1.9 1.7 2.7 3.5 4.0

CEREBOS PACIFIC NR 3.75 1182 0.33 14.3 13.0 12.1 3.3 3.2 3.0 6.6 6.6 6.6

EU YAN SANG NR 0.58 210 0.12 16.0 Na Na 2.2 Na Na 3.8 Na Na

THAI BEVERAGE NR 0.28 7031 1.97 15.6 14.5 13.7 2.9 2.8 2.7 5.0 5.5 5.9

BREADTALK GROUP NR 0.63 176 0.30 15.7 13.8 12.7 2.9 2.4 2.0 1.3 1.6 1.8

17.5 13.1 11.3 2.5 2.3 2.1 3.7 5.1 5.6

SUPER COFFEEMIX BUY 0.82 442 0.83 11.4 8.6 7.9 1.51 1.31 1.17 3.2 4.9 4.2 Source: DMG; Bloomberg

Figure 10: Forward P/E Figure 11: Forward P/B

Figure 12: Forward EV/EBITDA

Source: DMG estimates

+1SD=14.7

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Financial Table

Income Statement

FYE Dec (S$’mn) 2008A 2009A 2010E 2011E 2012E

Revenue 300.2 296.3 335.3 384.0 425.9

COGS (200.4) (192.9) (200.5) (230.2) (254.1)

Gross Profit 99.8 103.4 134.8 153.8 171.8

Other income 1.3 3.7 2.5 1.4 1.6

Distribution costs (35.5) (36.5) (43.6) (49.9) (55.4)

Admin expenses (28.2) (28.7) (36.9) (42.2) (46.8)

Opg Profit 36.1 41.7 56.8 63.1 71.2

Finance costs (0.5) (0.4) (0.4) (0.4) (0.4)

PBT 27.5 42.8 70.3 62.1 70.2

Tax (1.5) (2.4) (4.2) (5.0) (8.4)

Net Profit 25.1 40.2 64.4 55.2 59.6

Net Profit -Recurring 30.3 38.3 50.8 55.2 59.6

Balance Sheet

FYE Dec (S$’mn) 2008A 2009A 2010E 2011E 2012E Cash 28.6 73.6 145.6 161.2 184.5 Trade receivables 59.9 59.5 75.9 92.1 108.0 OR/Prepayments 5.2 6.5 9.2 15.8 19.8 Inventories 76.9 55.3 68.9 82.0 97.4 Fixed asset 107.8 102.8 106.7 110.3 113.6 Other LT asset 65.9 67.1 47.3 47.3 47.3 Trade & Bill payables 23.9 19.7 32.2 42.1 52.5 Other payables 35.4 40.1 71.6 77.9 87.4 ST Debt 5.5 2.1 2.1 2.1 2.1 LT Debt 3.6 2.0 2.0 2.0 2.0 Other LT liabilities 15.6 13.1 13.1 13.1 13.1 Shareholder's equity 249.8 277.2 320.4 357.3 397.3

Cash Flow Statement

FYE Dec (S$’mn) 2008A 2009A 2010E 2011E 2012E

Operating CF 34.9 66.3 61.1 45.4 49.9

Investing CF (22.8) (6.5) 24.9 (8.6) (8.4)

Financing CF (7.9) (15.1) (14.0) (21.2) (18.2)

Free cash flow 12.1 59.8 86.0 36.9 41.5

FCF Yield 2.7% 13.7% 19.6% 8.4% 9.5%

Liquidity 2008A 2009A 2010E 2011E 2012E

Net Cash (Debt) 16.7 66.4 138.4 154.0 177.3

Net Debt/Equity -6% -23% -42% -41% -43%

EBIT/Interest exp (x) 63.9 90.8 128.6 144.4 163.1

Days receivables 79 81 93 103 110

Days inventory 140 105 125 130 140

Days payables 108 113 105 110 115

Profitability 2008A 2009A 2010E 2011E 2012E

Sales Gth YoY 18% -1% 13% 15% 11%

EBITDA Gth YoY 40% 6% 25% 11% 12%

Net Profit Gth YoY 18% 26% 33% 9% 8%

Gross margin 33% 35% 40% 40% 40%

EBITDA margin 15% 16% 18% 17% 18%

Operating margin 12% 14% 17% 16% 17%

Dupont Analysis 2008A 2009A 2010E 2011E 2012E

Leverage A/E (x) 1.32 1.27 1.36 1.37 1.38

Asset Turn S/A (x) 0.87 0.81 0.74 0.75 0.75

Net margin 10% 13% 15% 14% 14%

ROE 12% 14% 16% 15% 15%

ROA 9% 10% 11% 11% 10%

Valuation 2008A 2009A 2010E 2011E 2012E

PER (x) 14.6 11.4 8.6 7.9 7.3

PBR (x) 1.70 1.52 1.32 1.18 1.06

EV/EBITDA (x) 9.4 7.8 5.0 4.3 3.5

Dividend yield 2.0% 3.2% 4.8% 4.2% 4.5%

PER -FD (x) ex-cash 12.05 7.45 4.66 5.43 5.03


DMG Research

DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report. DMG & Partners Securities Pte Ltd is a participant in the SGX Research Incentive Scheme and receives a compensation of S$7,500 per stock per annum covered under the Scheme. DMG & Partners Securities Pte Ltd is a joint venture between OSK Securities Berhad (a subsidiary of OSK Investment Bank Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte. Ltd. (Reg. No. 198701140E)

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2010 apr 30 - cimb - super coffeemix

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