A SUPER STOCK

How I Made a 243.5% Return

on Investment in This
Super Investment
Victor Chng

Copyright
2014 Fifth Person Pte. Ltd. All rights reserved.
No part of this report may be reproduced or
distributed in any form or by any means without the
prior written permission of Fifth Person Pte. Ltd.

Disclaimer
This is not a recommendation to purchase or sell
any of the above mentioned securities. The
information contained herein are the opinions and
ideas of the authors and is strictly for educational
purposes only. This information should not be
construed as and does not constitute financial,
investment or any form of advice. Any investment
involves substantial risks, including complete loss of
capital. Every investor has different strategies, risk
tolerances and time frames. You are advised to
perform your own independent research or to
contact a licensed professional before making any
investment decisions.
There are no warranties, expressed or implied, as
to the accuracy, completeness, or results obtained
from any information set forth herein. Fifth Person
Pte. Ltd., its related and affiliate companies and/or
their employees shall in no event be held liable to
any party for any direct, indirect, punitive, special,
incidental, or consequential damages arising directly
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FifthPerson.com

A Super Stock

Contents
A Super Stock 3
How did we identify the idea? 3

Business 4
Branded Consumer Products 4
Raw Ingredients 4
Segmental Sales 5
The Tipping Point: Key Growth
Drivers 6
Expansion Updates, of ingredients
sales in 2010 6

Management 7
Behaviour Analysis 7

Financials 8
Peers Analysis 10

Valuation 12
Divestment: Why We
Sold? 13
Final Words 15

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A Super Stock
By Victor Chng & Rusmin Ang | The Fifth Person
Its a great pleasure for us to share
with you our investment philosophy
on how we identified and invested in
Super Group in 2011 and later sold it
for a 243.5% gain just two years later.

stock price came crashing down

during the 2008/2009 recession.

That was a huge signal for us to look

deeper into Super. We usually avoid
companies who expand and diversify
into non-core businesses (which
+243.5%
Super was guilty of). However by
Price appreciated in 2 years!
that time in 2011 Super had decided
The information provided below are to divest their non-core businesses
all based on research and analysis and focus back onto their core
done at that point in time. What is operations.
crucial here is that you understand
our investment thought process -- The other thing that caught our eye
from identifying the investment idea was the growth of their ingredient
to the analysis of the company to the segment sales which grew from a
signs that told us to divest the meagre $1.5 million (2006) to $58.2
company. For a 243.5% gain million (2010). Thats an eye popping
(excluding dividends) in two years, 3,780% growth (150%+ CAGR) in
hey, I think we did not too bad here! just four years.
Have fun reading!
Of course, you dont just jump in the
moment you pick up a piece or two
good news. Its supremely important
How did we identify the idea?
to understand the full picture and
Back in 2011, we were screening for what youre buying into before you
stocks which were heavy on insider invest your hard-earned money in any
buying. That was when we noticed stock.
that the chairman and directors of
Super Group were increasing their So how did we analyze Super and
stakes in their company when its decide to go ahead with the
investment? Read on :)
FifthPerson.com

A Super Stock

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Business
Supers core business consists of two segments branded consumer products
and raw ingredients.

Branded Consumer Products

Supers Brands (Source: Company)

Super offers a range of over 200 instant coffee and convenience products.
Brands include household names like Super, Caf Nova, Coffee King, Owl,
Super Power, Ye Ye, Gold Eagle, Liang Bo, Negresco and Super Kids.
They have a strong brand presence in Singapore, Malaysia, Thailand &
Myanmar and Super is ranked in the top 3 for in market share for instant
coffee for those countries.

Raw Ingredients
Super also produces raw ingredients such as non-dairy creamers, spray-dried
coffee and freeze-dried coffee. Nearly 80% of ingredient sales are sold mainly
to industrial users in Taiwan and China, while the rest is used by Super
internally.
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A Super Stock

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Segmental Sales
South East Asia (Exc. Singapore)
Singapore
East Asia
Others

Sales by Region
South East Asia
(excluding Singapore)
is Supers biggest
revenue contributor.

6%
20%

This is followed by
East Asia (Taiwan &
China), Singapore and
Others.

11%

63%

Sales by Product
Supers coffee product is
still the largest revenue
contributor at 62%.

2%
1%
13%
14%

8%

62%

Coffee
Cereal
Others (Branded Consumer Sales)
Non-Dairy Creamer
Soluble Coffee Powder
Other (Ingredient Sales)

FifthPerson.com

A Super Stock

Ingredient sales which

consists of Non-Dairy Creamer,
Soluble Coffee and Other
(Ingredient Sales) account for
16% of total revenue.
Other (Branded Consumer
Sales) and Cereal Products
account 14% and 8%
respectively.

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The Tipping Point: Key Growth

Drivers

larger capacities of production, the

company enjoys economies of scale,
increasing production efficiency and
reducing production costs.

Supers ingredient sales grew from

$1.5m (2006) to $58.2m (2010) which Expansion Updates, of ingredients
is a compound annual growth rate sales in 2010
(CAGR) of 150%.
Due to strong demand in the market,
In 2006, ingredient sales only Super completed the installation of
accounted for 0.7% of Supers total two additional non-dairy creamer
revenue. At this amount of production lines in Wuxi, China
contribution, even a doubling of increasing the existing production
ingredient sales would have been from 75,000mt to 125,000mt per
insignificant to the groups total annum.
revenue figure. The tipping point
came when ingredient sales started to There was also a construction of a
contribute to 16.5% of the groups production facility to produce freezesales in 2010. At this point, any slight dried soluble coffee powder. In 2010,
increase in ingredients sales would Super only produced spray-dried
have significant impact on total coffee powder with an annual
revenue.
production of 10,000mt. Freeze-dried
soluble coffee powder is viewed as
In March 2011, Supers first quarter superior in terms of flavour and aroma
results showed that ingredient sales over spray-dried coffee. The plant was
grew by 104%. The management completed in June 2012 with an
mentioned it was the result of strong annual production of 1,500mt.
demand in the East Asia market.
The soaring consumer demand and
Due to the strong demand, the Supers financial and production
management planned to increase capability to meet this demand meant
production capacity by another that the company was well poised to
25,000mt to 100,000mt by 3Q2011. reap substantial profits due to this
This signified a strong growth driver explosion
in
growth.
for the company. Additionally, at
FifthPerson.com

A Super Stock

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Management
Behaviour Analysis
In 2010, the management made a
successful strategic decision (as you
will see later) to divest all their noncore businesses and focused back
onto their core business branded
consumer products and ingredients
sales.

In 2008/2009, the chairman and

directors of the company also
purchased a substantial amount of
Super stock from the open market
increasing their ownership stake.
This gave us further confidence in
the future growth prospects of the
company.

They also continued to innovate and

introduce new branded consumer
products with higher margins to the
market.

As legendary Wall Street investor,

Peter Lynch, used to say:

In alignment with shareholders, the

management declared a dividend
pay-out policy of at least 50% of the
groups annual profits as dividends
to shareholders.

Insiders might sell their shares for

any number of reasons, but they buy
them for only one: they think the
price will rise.

Insiders might sell their shares for any number of reasons, but they
buy them for only one: they think the price will rise.
Peter Lynch

FifthPerson.com

A Super Stock

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Financials
Financial Track Record
Year Dec, S$m
Revenue
Net Profit
Cash Flow
Capex
Free Cash Flow
Cash & Cash Equivalent
Growth
Revenue Y-O-Y Growth
Net Profit Y-O-Y Growth
Cash Flow Y-O-Y Growth
Account Receivables Y-O-Y Growth
Inventory Y-O-Y Growth
Profitability
Gross Profit Margin
EBITDA Margin
Net Profit Margin
Cash Flow to Net Income Ratio
Expenses Management
SGA Ratio
Operating Expense to Sales Ratio

2004
171.8
18.2
26.4
9.4
17
35.4

2005
187.9
23.3
21.7
19.1
2.6
22.8

2006
210.6
18.3
5.5
18.9
-13.4
22.8

2007
253.5
25.5
5.1
11.4
-6.3
21.5

2008
300.1
30.5
35
7.2
27.8
25.8

2009
296.2
38.1
66.4
6.8
59.6
70.4

2010
351.2
46.9
55.4
14.5
40.9
141.7

9.4%
28.0%
-17.8%
16.6%
39.9%

12.1%
-21.7%
-74.7%
23.1%
43.7%

20.4%
39.8%
-7.3%
8.1%
10.7%

18.4%
19.6%
586.3%
5.0%
24.2%

-1.3%
24.9%
89.7%
-31.3%
-28.2%

18.6%
23.0%
-16.6%
57.2%
26.4%

42.5%
20.1%
10.6%
1.3

40.6%
18.9%
12.4%
0.9

35.8%
15.6%
8.7%
0.3

34.1%
13.6%
10.1%
0.2

33.2%
15.0%
10.2%
1.1

34.9%
16.2%
12.9%
1.7

37.2%
17.2%
13.3%
1.2

26.3%
85.4%

25.9%
85.9%

24.5%
89.1%

23.6%
89.8%

21.2%
88.4%

22.0%
87.2%

21.8%
85.6%

When we had a look Supers books, they told a story of company that was
financially sound and that was growing increasingly well. Few things stood out:
Positive trend in their revenue and net profit.
Supers business model was able to stand resilient during The Great
Recession. The group posted a stronger profit margin of 24.9% in
2008/09 despite a drop in revenue.
Similarly, gross profit margins also increased from 33.2% (2008) to
37.2% (2010). This increase in margins was due to the introduction of
new products with better margins, better cost management and
increased production efficiency.
FifthPerson.com

A Super Stock

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Management Efficiency
Return on Equity
EBITDA on Equity
Return on Assets
Receivable Days
Payable Days
Inventory Turnover Days
Cash Conversion Cycle Days
Financial Strength
Market Cap
Outstanding Shares
Cash Ratio
Total Debt to Equity
Net Debt to Equity
Dividend
Dividend Per Share ($)
Dividend Yield
Dividend Payout
Valuation
Price to Earning Ratio (PE)
Price to Sales Ratio (PS)
Price to Book Ratio (PB)
Price to Cash Flow (PCFO)
EV to EBITDA
EV to Cash Flow (EV/CFO)

2004
11.9%
22.6%
8.1%
98.4
57.6
102.7
143.4

2005
13.5%
20.6%
9.3%
104.9
65.1
127.2
167.0

2006
9.8%
17.6%
6.3%
115.3
50.0
151.0
216.3

2007
11.2%
15.1%
8.1%
103.5
43.9
135.2
194.8

2008
10.0%
18.0%
7.3%
91.8
43.3
140.1
188.5

2009
14.5%
17.3%
11.0%
64.0
37.3
104.5
131.2

2010
14.2%
18.4%
10.5%
84.8
46.5
115.6
153.9

202.4
493.7
0.7
2.6%
-20.7%

219.6
493.4
0.4
2.3%
-10.9%

313.2
493.2
0.3
18.8%
6.5%

428.6
542.5
0.4
3.2%
-6.3%

219.4
541.6
0.4
3.4%
-6.9%

344.1
537.6
1.1
1.4%
-24.0%

785.9
557.4
1.5
0.9%
-42.1%

0.0160
4.0%
33.2%

0.0260
0.0540
4.1%
4.1%
34.6%
50.8%

0.0095 0.0111
2.3%
2.5%
22.7%
22.6%
11.1
1.2
1.4
7.7
5.0
6.5

0.0128
0.0160
2.0%
2.0%
25.0%
28.6%

9.4
1.2
1.3
10.1
5.7
9.3

17.2
1.5
1.7
56.9
9.9
59.2

16.8
1.7
1.9
84.0
12.0
81.2

8.7
0.7
0.9
6.3
4.5
5.8

8.6
1.2
1.3
5.2
5.8
4.2

16.8
2.2
2.2
14.2
9.8
11.7

Cash & cash equivalents increased We also took a look at EBITDA

from $36.4m (2004) to $141.7m
on equity (which we view as a
(2010).
better
tool
for
accessing
management ability to generate
Super produces high quality
returns) Super posted 18.4%
earning as we can see from the
which is above our benchmark of
cash flow to net income ratio; it is
15%.
consistently above 1.0 from 2008
to 2010.
Super is a cash rich company with
a cash ratio of 1.5 which was
Management also indicated that
reflected in their cash hoard of
they would be reducing their costs
$141.7 million. Debt to equity
which was reflected in the
ratio was as low as 0.9% which
numbers with operating expenses
meant that they didnt need any
decreasing.
debt to expand their business.
Return on equity increased from
10% (2008) to 14.2% (2010).
FifthPerson.com

A Super Stock

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 Dividend per share was also increasing with an average dividend yield of 3%.
Supers historical dividend pay-out ratio was between 22%-34% which was
increased to a minimum pay-out of 50%. In addition, Supers profits were
growing steadily as well which meant that the dividends per share were also
going up and up.
Supers PE ratio was a bit on the high side. We focused more on
EV/EBITDA because that took into account their huge cash position, which
gave us a truer reflection of their value. In 2010, Supers EV/EBITDA was
9.8 which was a fair valuation. But with ingredient sales growing at a rate of
150% p.a., that figure of 9.8x looked way much cheaper.

Peers Analysis
Referring to the next page, Page 11 - Peers Comparison, Supers ingredient
segment that they were able to have better cost management and production
efficiency which led to higher gross and net profit margins compared to their
peers.
As a testament to their management skills, Super was able to generate a
higher ROE even with the lowest debt to equity compared to their peers.
Food Empire had the highest receivable days (115.5 days) because they
sell to distributors instead of direct to end consumers. In our view, the
disadvantages lie mainly in Food Empires business model.
Super was growing the fastest in the industry (25.5%) compared to Food
Empire (-10.1%) and Viz Branz (6.3%).
Super might have the highest PE but they also had the lowest PEG
because they were growing so much faster than the rest. Using the
EV/EBITDA ratio, Viz Branz had the cheapest valuation, but Supers
solid business model and strong growth made up for their more
expensive EV/EBITDA, which at 9.8 was considered fair value.
Super also had the highest dividend yield among its peers.
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A Super Stock

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FifthPerson.com

A Super Stock

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Valuation
2004-2008 2006-2010 2004-2010

Revenue

8.1%

13.6%

12.7%

Earnings

24.0%

26.5%

17.1%

Cash flow

25.8%

78.1%

13.1%

Compounded Annual Growth Rate

And it is acquired
When we compared Super with its
peers, the company was definitely the
most financially sound and had the
most growth potential among them.
Super had a strong balance sheet with
$141.7 million cash hoard and a low
debt to equity ratio of 0.9%. Their
ingredient sales segment was growing
at a massive 150% p.a. for the past
four years. The latest quarter that was
released at the point in time (March
2011) showed that ingredients sales
doubled up again!

Looking at the CAGR table above,

Supers revenue and earnings growth
from 2006-2010 is 13.6% and 26.5%
respectively. Taking into account that
future growth may not always pan out
as expected (as witnessed when
Supers revenue and earnings growth
during 2008-2010 dropped to 8.1%
and 24% respectively), we used a more
Management had divested all their
conservative growth projection of 15%.
non-core businesses and decided to
focus back on their core business.
Supers intrinsic value was estimated at
Management
also
declared
a
$1.78 (please note the intrinsic value
minimum dividend pay-out of 50% of
took into account the sizeable cash
annual net profit to shareholders.
position Super had). At that point in
With all these positive factors and
time, Super was trading at a 30%
hardly any negative ones, we were
discount to our intrinsic value, with PE
more than willing to pay a fair price
ratio and EV/EBITDA was 15.6 times
for Super, especially with all the
and 9.8 times respectively.
growth drivers already in place.
In March 2011, we entered and
purchased Super at $1.31.

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A Super Stock

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Divestment: Why We Sold?

Historical Share Price, 2011 2013

(Source: markets.ft.com)
We bought Super at a price of $1.31
in March 2011 and later sold it at
$4.50 in June 2013 a 243.5% gain in
just over two years.

Many were expecting Super to shoot

above $5. Well, it didnt happen and
the stock has since dropped to $3.76
at this time of writing (Feb 2014).

When we sold the stock, many of our How were we so sure that it was the
friends questioned our decision right time to sell?
because the stock shot to an all-time
high of $4.93 right after we sold!
There were certain factors that we
reasoned that finally triggered our
decision to sell Super in 2013.

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A Super Stock

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Reasons for Selling

Supers 1Q2013 results showed
revenue and net profit growth at 9%
and 25% respectively. The slowing
revenue growth was due to ingredient
sales growth slowing to 33% and
branded consumer sales growth at
only 1%.

rate, theoretically the company will

eventually grow at the same rate as its
ROE.
Applying that to Super with its ROE
at 19%, its growth rate will similarly
be 19%. Based on a PE of 33.0 and a
growth rate of 19%, Supers PEG is
1.73x which is overvalued. In
addition, Super actually pays out 50%
of profits as dividends which means
its true growth rate is even less in fact.

Moreover, the 25% growth in net

profit in 1Q2013 was due to cost
reduction in raw materials and a forex
exchange gain. Hence it was not
organic growth. We also didnt, and
couldnt, expect ingredients sales to Finally, we did a discounted earnings
continue to growing at a whopping projection with a highly optimistic
150% p.a. anymore.
growth rate of 25% and its intrinsic
value only worked out to $4.48 (also
When Super was trading at $4.50, the taking into account the net cash
PE and EV/EBITDA was 33.0 and position) which was two cents away
25.0 respectively. This is considered from where Super was already trading
to be on the high side, especially so at.
when compared to when we bought it
at PE 15.6 and EV/EBITDA 9.8.
Based on these factors, we decided to
cash in and sold the stock at $4.50. In
Theoretically, we can also deduce hindsight, with Supers stock hovering
the growth rate of a company through below $4.00 as of now (Jan 2014), it
its ROE. Assuming a company does seem that our decision has paid
doesnt give out any dividends and off rather handsomely.
they maintain their ROE at a certain

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A Super Stock

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Final Words
We hope this simple report has
opened your eyes to what safe,
rational investing is and how it can
make you a very tidy profit if you do
your proper research and due
diligence.

purchasing the stock. With our

valuation models in hand and using
the ones that best fit Super and its
scenarios, only then were we certain
that the stock was undervalued and
represented a good deal.

Super was already an established

brand in the market and like all
established players, growth can be
rather limited. We would have
missed the boat on Super had we not
taken a deeper look at its business
model and financials and noticed that
a segment (ingredient sales) was
growing at a searing pace of 150% p.a.
This kind of growth of in a mature
company is rare and hard to come by.

Once you have done your full

research and you are certain of your
conclusions, waste no time in
investing because time and tide wait
for no man. If you wait too long
because you are unsure, you might
miss the boat altogether. You have to
trust your logic and analysis and jump
(assuming you really did your
homework!).

However this alone was not enough

to invest in the stock; we had to make
sure that the company was financially
sound and all risk factors were
properly considered protecting our
downside. Once we were certain that
the risks were limited and the
probability of this investment going
sour was unlikely, we still didnt jump
in!

As in was in our case, our conclusions

did prove right after all. A 243.5%
gain in a little over two years is
nothing to sniff at. Not to toot our
own horn here, but we just want to
show you how profitable it can be
when you apply logic and knowledge
to your investing. A Super stock
was only super because it all made
sense.
Happy investing!

We had to make sure that we were

getting a good or fair price for

FifthPerson.com

Victor Chng & Rusmin Ang

A Super Stock

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