Super Coffeemix: Getting a shot of caffeine?

Company Visit. We recently visited Super Coffeemix Manufacturing (Super)
and came away impressed by management strategy for growth.
Stellar 1Q07 results but due to investments. Super recently posted a
good set of results with revenue up 18% YoY and net profit up 44% YoY to
S$10.8m. However the growth in 1Q07 was mainly due to gains from Super's
equity investments and from lower finance costs. A better matrix for its
core business' performance is its gross profit margins. In that context between
FY05 and FY06, Super's gross profit margin fell from 40.6% to 35.8% and
this is attributed to rising commodity prices. However its margin declined
appeared to have stabilised in 1Q07. Nevertheless we still see Super to be
vulnerable to future fluctuating coffee bean prices.
Ramping up capacity to meet demand. Super recently ramped up the
production capacity of its Malaysian coffee powder plant from 3,000 to
8,000 metric tons per annum. This has enabled Super to meet the overflowing
demand for soluble coffee powder. In the last 2 years, demand for soluble
coffee powder has exceeded Super's production capacity, which led Super
to outsource its production. With the enlarged capacity, we expect to see
an increase in Super's sales.
Growth via JVs. Super has teamed up with various partners to market
new products (e.g. JV with China Lifestyle to manufacture potato chips)
and tap new markets (e.g. JV with San Miguel to enter the Philippines
coffee market). We noted a recent JV with strategic investors Sam Goi and
Peter Chang for commercial property development in Changzhou, PRC.
Although this is not in line with Super's core businesses, it could turn out
to be an opportune investment to tap the current booming property market
in the PRC.
Synergistic tie-up with YHS? An interesting recent development in the
theme of M&A is Yeo Hiap Seng Ltd's (YHS) recent acquisition of a strategic
11.3% stake in Super. YHS's rationale for the investment is to enable it
leverage of Super's distribution network and allow for synergistic benefits.
We do see some possibilities of collaboration between the 2 F&B players.
Super could potentially tap on YHS's expertise in canned drinks production
and there could also be joint product development. It is difficult to see how
YHS's strategic investment will pan out, however for now, Super will most
probably continue to expand its footprint via JVs. We do not have a rating
on Super.