Spike in Robusta coffee bean for Super Group

Since our upgrade to BUY in Feb12, Super’s share price had returned +42% to close at all-time highs of S$2.21 recently. This translates to a blended FY12-13F 17x PER that is +1.6SD to its historical mean 12x, suggesting limited room for near-term upside. We see some headwinds from higher Robusta coffee bean prices that averaged ~US$2,125/tonne in May12, which lifted the year’s average to ~US$2,000/tonne. We factor in potentially higher raw material costs for 3Q12 production and revised down our FY12-13 estimates by 4%-3% respectively. We continue to like Super for its dominant position in SE Asia instant coffee market, brand-building efforts and strong cash flow generative characteristics but reason its risk-reward trade off is fair at current levels. We are now NEUTRAL at a lower TP of S$2.12 (previously S$2.18), pegged to 15x blended FY13-14F PER.

Spike in Robusta bean prices in May12. Coffee bean prices peaked above US$2,200/tonne in May12 and have since softened. We estimate 3Q12 input costs to be ~US$2,100/tonne, higher than ~US$1,900/tonne for 1Q12. Sugar prices were softer at
~US$560/tonne and palm oil prices were stable at ~US$1,000/tonne in May12 (YTD12: US$605 and US$1,020 respectively).

Fine-tuning estimates. In view of recent spike in Robusta bean prices, we fine tune our FY12 earnings estimates down by 4% to S$68m, and now expect 2Q-4Q12 quarterly earnings to grow slightly slower at 19%-74%-41% y-o-y to S$16m-S$16m-S$19m (previously S$16m-S$18m-S$19m) respectively.

A fair risk-reward trade off. At S$2.21, Super currently trades at a blended FY12-13F 17x PER that is +1.6SD to its historical mean 12x reason. Dampened by recent spike in coffee bean prices, we see a fair risk-reward trade off and hence, are now NEUTRAL (previously BUY) at a slightly lower TP of S$2.12.

Key risks. Upside potential to our NEUTRAL call includes better margins from an improved product mix and higher dividend payout ratios. Downside risks include sharp spike in input prices i.e. Robusta coffee beans, palm oil and sugar.