April 30, 2010

SINGAPORE EQUITY
Investment Research

Initial Coverage Private Circulation Only

CONSUMER
Tan Han Meng, CFA, CPA BUY Initiate
+65 6232 3839 SUPER COFFEEMIX Price S$0.815
han-meng.tan@dmgaps.com.sg
MANUFACTURING Target S$1.10
Terence Wong, CFA
+65 6232 3896 Higher payouts or M&A as cash grows
terence.wong@dmgaps.com.sg

Stock Profile/Statistics
Re-discover a Super brand; Initiate with BUY. Established in 1987, Super
Bloomberg Ticker SUPER SP
STI 2959.01 Coffeemix Manufacturing (Super) is Singapore’s leading instant beverage
Issued Share Capital (m) 537.74 group that commands ~11% market share in its key S$1.4b market, consisting
Market Capitalisation (S$m) 442.17
52 week H | L Price (S$) 0.85 0.43
of Singapore, Malaysia, Thailand and Myanmar. Super owns >10 brands.
Average Volume (3m) ‘000 1089.48 including Super, Owl and Café Nova, and offers 300+ products across 52
YTD Returns (%) 27.34 countries worldwide. Despite its resilience and high cash generative
Net gearing (x) Cash
Altman Z-Score 4.82 characteristics, current share price trades at early cycle valuation of 9x FY10E
ROCE/WACC 1.67 PE and offers a dividend yield of 4-5%. Initiate with BUY and TP of S$1.10,
Beta (x) 0.72 representing an upside potential of 35% over the next 12 months.
Book Value/share (S¢) 0.52

High cash generative characteristics. Super has emerged stronger from

Major Shareholders
recent economic turmoil. Revenue and recurring net profit grew at an average
Goi Seng Hui 16.80%
Te Lay Hoon 12.57% of 8% and 22% per annum over 2007-09 respectively, on the back of strong
Teo Kee Bock 12.11% contribution from its new ingredient sales division and margin expansion. Free
Te Kok Chiew 10.00%
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
Share Performance (%)
S$120m,representing 30% of its market capitalisation. We believe this will
Month Absolute Relative
1m 8.7 7.8 result in higher payouts or M&A in the near future.
3m 26.4 20.0
6m 21.6 11.0
12m 79.1 17.0
Potential upside catalysts. Super will continue to benefit from the region’s
GDP growth and the current low Robusta coffee prices, which suggest above
6-month Share Price Performance historical average margins in FY10E. The counter has attracted attention from
(S$)
0.90
the investment community since the announcement of its TDR dual-listing
0.85
plan. We expect share price to respond positively to quarterly earnings
0.80 momentum, its dual-listing in Taiwan in 2H10 and potential M&A news flow.
0.75

0.70 Downside risks. Key risks include unexpected sharp increases in raw material
0.65 prices, delay in listing plans and potential M&A overpayments.
0.60

0.55

0.50
2-Nov-09 2-Jan-10 2-Mar-10

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

DMG
OSK Research
See important disclosures at the end of this publication 1
 TABLE OF CONTENTS

About the Company 3

Discussion 4

Forecast 6

Valuation and Downside Risks 7

Financial Tables 9

Disclaimer 10

DMG Research
See important disclosures at the end of this publication 2
 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
rd
Super distributes its products directly or through 3 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.

DMG
OSK Research
See important disclosures at the end of this publication 3
 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
320 S$'m

Ingredient sales to industry was a new

300 revenue driver for FY08 growth

Product innovation and market

280 expansion were the traditional
drivers to acheive revenue
growth
260

240

220

200
FY06

FY07

FY08

FY08
BCG

IS

BCG

IS

BCG

IS

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

DMG Research
See important disclosures at the end of this publication 4
 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 %

2500 36%
35%
35%
2000
35%
34%
1500 34%

33% 34%
1000
33%
500
33%

0 32%
2007 2008 2009
GM % (RHS) Robusta Sugar Palm Oil
Source: DMG estimates, Company

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.

DMG Research
See important disclosures at the end of this publication 5
 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 %

2500 45%
40%
34% 33% 35% 40%
2000 35%
30%
1500
25%
20%
1000
15%

500 10%
5%
0 0%
2007 2008 2009 2010
GM % (RHS) Robusta Sugar Palm Oil
Source: DMG estimates, Company

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.

DMG Research
See important disclosures at the end of this publication 6
 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
Gross Margin 40% 38 44 51 58 65
39% 34 40 47 53 60
38% 31 37 43 50 56
Source: DMG estimates

DMG Research
See important disclosures at the end of this publication 7
 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

Mkt
3m
Company Rating Price Cap
Avg P/E (x) P/B (x) Yield (%)
Vol
29Apr S$'m S$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

20 2.30

18 2.10

1.90
16 +1SD=14.7
1.70 +1SD=1.5
14
1.50
12
1.30 Ave=1.2
10 Ave=11.3
1.10
8
0.90
-1SD= 7.8
6 0.70 -1SD= 0.8

4 0.50
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

Figure 12: Forward EV/EBITDA

18

16

14

12
+1SD=9.3
10

6
Ave=6.5
4
-1SD= 3.7
2

0
Jan-02 Apr-03 Jul-04 Oct-05 Jan-07 Apr-08 Jul-09

Source: DMG estimates

DMG Research
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 Financial Table

Income Statement
FYE Dec (S$’mn) 2008A 2009A 2010E 2011E 2012E Profitability 2008A 2009A 2010E 2011E 2012E
Revenue 300.2 296.3 335.3 384.0 425.9 Sales Gth YoY 18% -1% 13% 15% 11%
COGS (200.4) (192.9) (200.5) (230.2) (254.1) EBITDA Gth YoY 40% 6% 25% 11% 12%
Gross Profit 99.8 103.4 134.8 153.8 171.8 Net Profit Gth YoY 18% 26% 33% 9% 8%
Other income 1.3 3.7 2.5 1.4 1.6 Gross margin 33% 35% 40% 40% 40%
Distribution costs (35.5) (36.5) (43.6) (49.9) (55.4) EBITDA margin 15% 16% 18% 17% 18%
Admin expenses (28.2) (28.7) (36.9) (42.2) (46.8) Operating margin 12% 14% 17% 16% 17%
Opg Profit 36.1 41.7 56.8 63.1 71.2
Finance costs (0.5) (0.4) (0.4) (0.4) (0.4)
PBT 27.5 42.8 70.3 62.1 70.2 Dupont Analysis 2008A 2009A 2010E 2011E 2012E
Tax (1.5) (2.4) (4.2) (5.0) (8.4) Leverage A/E (x) 1.32 1.27 1.36 1.37 1.38
Net Profit 25.1 40.2 64.4 55.2 59.6 Asset Turn S/A (x) 0.87 0.81 0.74 0.75 0.75
Net Profit -Recurring 30.3 38.3 50.8 55.2 59.6 Net margin 10% 13% 15% 14% 14%
ROE 12% 14% 16% 15% 15%
Balance Sheet ROA 9% 10% 11% 11% 10%
FYE Dec (S$’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 Valuation 2008A 2009A 2010E 2011E 2012E
OR/Prepayments 5.2 6.5 9.2 15.8 19.8 PER (x) 14.6 11.4 8.6 7.9 7.3
Inventories 76.9 55.3 68.9 82.0 97.4 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
Fixed asset 107.8 102.8 106.7 110.3 113.6 Dividend yield 2.0% 3.2% 4.8% 4.2% 4.5%
Other LT asset 65.9 67.1 47.3 47.3 47.3 PER -FD (x) ex-cash 12.05 7.45 4.66 5.43 5.03

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

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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.

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