April 30, 2010

SINGAPORE EQUITY Investment Research Initial Coverage
CONSUMER
Tan Han Meng, CFA, CPA +65 6232 3839 han-meng.tan@dmgaps.com.sg Terence Wong, CFA +65 6232 3896 terence.wong@dmgaps.com.sg
Stock Profile/Statistics Bloomberg Ticker STI Issued Share Capital (m) Market Capitalisation (S$m) 52 week H | L Price (S$) Average Volume (3m) ‘000 YTD Returns (%) Net gearing (x) Altman Z-Score ROCE/WACC Beta (x) Book Value/share (S¢) Major Shareholders Goi Seng Hui Te Lay Hoon Teo Kee Bock Te Kok Chiew 16.80% 12.57% 12.11% 10.00% SUPER SP 2959.01 537.74 442.17 0.85 0.43 1089.48 27.34 Cash 4.82 1.67 0.72 0.52

Private Circulation Only

SUPER COFFEEMIX MANUFACTURING

BUY Price Target

Initiate S$0.815 S$1.10

Higher payouts or M&A as cash grows
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.

Share Performance (%) Month 1m 3m 6m 12m Absolute 8.7 26.4 21.6 79.1 Relative 7.8 20.0 11.0 17.0

6-month Share Price Performance
(S$) 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 2-Nov-09

2-Jan-10

2-Mar-10

FYE Dec (S$’m) Revenue Gross Profit Net Profit Net Profit - Recurring P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield (%) ROE (%) Net Gearing (%) Source: DMG estimates

2008
300.2 99.8 25.1 30.3 14.6 1.7 9.4 2.0% 12% -6%

2009
296.3 103.4 40.2 38.3 11.4 1.5 7.8 3.2% 14% -23%

2010E
335.3 134.8 64.4 50.8 8.6 1.3 5.0 4.8% 16% -42%

2011E
384.0 153.8 55.2 55.2 7.9 1.2 4.3 4.2% 15% -41%

2012E
425.9 171.8 59.6 59.6 7.3 1.1 3.5 4.5% 15% -43%

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

TABLE OF CONTENTS

About the Company Discussion Forecast Valuation and Downside Risks Financial Tables Disclaimer

3 4 6 7 9 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 Teo Kee Bock Goi Seng Hui Te Lay Hoon Te Kok Chiew Other Major Shareholders YHS Investment CIM II Limited Total Number of Shares Source: Company 2009 AR Designation Chairman/ MD Vice Chairman/ Non-exe director Exec director Exec director No. of Shares ('m) 65 90 68 54 65 39 538 % 12.11% 16.80% 12.57% 10.00% 12.10% 7.30%

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 Research OSK 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

300

Ingredient sales to industry was a new revenue driver for FY08 growth Product innovation and market expansion were the traditional drivers to acheive revenue growth

280

260

240

220

200

FY06

FY07

FY08

Figure 3: Divisional Sales and Growth Trend
FYE Dec Total sales BCG-Coffee products BCG-Cereal products BCG-Others IS - Non-diary creamer IS - Soluble coffee powder 2006A 211 157 21 32 1 0 S$’m 2007A 2008A 254 300 192 193 24 27 34 45 3 26 0 9 2009A 296 199 27 39 22 9 2007A 20% 23% 17% 8% Nm 20% Growth % 2008A 18% 1% 12% 31% Nm 18% 2009A -1% 3% 1% -14% -16% -1%

Source: DMG estimates, Company

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

FY08

BCG

BCG

BCG

IS

IS

IS

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 35% 2000 35% 34% 1500 33% 34% 34% 33% 500 33% 0 2007 GM % (RHS)
Source: DMG estimates, Company

36% 35%

1000

32% 2008 Robusta Sugar 2009 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 Owl Coffee Jiangsu Hengshun Care Property Sun Resources Tianjin Super Lifestyle Food
Source: DMG estimates, Company

Year 2003 2006 2006 2005 2007

Cost S$'m 6.0 14.0 10.1 7.7 3.5

Est. Gain S$’m Na 3.5 10.1 Na Na

Status To keep Sold in 1Q10 Sold in 1Q10 To sell Provision

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 Countries Singapore Malaysia Thailand Myanmar China Source: IMF 2008 1.4 4.6 2.5 3.6 9.6 2009 (2.0) (1.7) (2.3) 4.8 8.7 2010E 5.7 4.7 5.5 5.3 10.0 2011E 5.3 5.0 5.5 5.0 9.9 Est. Revenue Exposure 12% 13% 30% 16% 12%

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 34% 2000 33% 35% 40% 45% 40% 35% 30% 1500 25% 20% 15% 500 10% 5% 0 2007 GM % (RHS)
Source: DMG estimates, Company

1000

0% 2008 Robusta 2009 Sugar 2010 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.

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)
152 42% 41% 40% 39% 38% -10%
43 40 38 34 31

-5%
50 47 44 40 37

Revenue 0
57 53 51 47 43

+5%
64 60 58 53 50

+10%
71 67 65 60 56

Gross Margin

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$1.10/share, which represents 35% upside potential on a 12month horizon. Key risks to our estimates include unexpected sharp increase in raw material prices, delays in TDR dual-listing plans and M&A overpayments. Figure 9: Valuation Comparison
Company Rating 3m Avg Vol 29Apr S$'m S$m Price Mkt Cap P/E (x) 09A 10E 11E P/B (x) 09A 10E 11E Yield (%) 09A 10E 11E

DEL MONTE PACIFIC PETRA FOODS CEREBOS PACIFIC EU YAN SANG THAI BEVERAGE BREADTALK GROUP

NR NR NR NR NR NR

0.39 1.12 0.58 0.63

416 0.17 596 0.02 210 0.12 176 0.30

26.2 17.2 14.3 16.0 15.6 15.7 17.5

8.9 15.3 13.0 Na 14.5 13.8 13.1 8.6

7.9 10.2 12.1 Na 13.7 12.7 11.3

1.5 2.0 3.3 2.2 2.9 2.9 2.5

1.4 1.9 3.2 Na 2.8 2.4 2.3

1.3 1.7 3.0 Na 2.7 2.0 2.1

3.0 2.7 6.6 3.8 5.0 1.3 3.7 3.2

8.3 3.5 6.6 Na 5.5 1.6 5.1 4.9

9.8 4.0 6.6 Na 5.9 1.8 5.6 4.2

3.75 1182 0.33 0.28 7031 1.97

SUPER COFFEEMIX Source: DMG; Bloomberg

BUY

0.82

442 0.83

11.4

7.9 1.51 1.31 1.17

Figure 10: Forward P/E
20 18 16 14 12 +1SD=14.7

Figure 11: Forward P/B
2.30 2.10 1.90 1.70 1.50 1.30 Ave=1.2 +1SD=1.5

10 8 6 4 Jan-02

Ave=11.3

1.10 0.90

-1SD= 7.8 0.70 0.50 Jan-02

-1SD= 0.8

Jan-04

Jan-06

Jan-08

Jan-10

Jan-04

Jan-06

Jan-08

Jan-10

Figure 12: Forward EV/EBITDA
18 16 14 12 10 8 6 4 2 0 Jan-02 -1SD= 3.7 Ave=6.5 +1SD=9.3

Apr-03

Jul-04

Oct-05

Jan-07

Apr-08

Jul-09

Source: DMG estimates

DMG Research See important disclosures at the end of this publication 8

Financial Table

Income Statement FYE Dec (S$’mn) Revenue COGS Gross Profit Other income Distribution costs Admin expenses Opg Profit Finance costs PBT Tax Net Profit Net Profit -Recurring Balance Sheet FYE Dec (S$’mn) Cash Trade receivables OR/Prepayments Inventories Fixed asset Other LT asset Trade & Bill payables Other payables ST Debt LT Debt Other LT liabilities Shareholder's equity Cash Flow Statement FYE Dec (S$’mn) Operating CF Investing CF Financing CF Free cash flow FCF Yield

2008A 300.2 (200.4) 99.8 1.3 (35.5) (28.2) 36.1 (0.5) 27.5 (1.5) 25.1 30.3

2009A 296.3 (192.9) 103.4 3.7 (36.5) (28.7) 41.7 (0.4) 42.8 (2.4) 40.2 38.3

2010E 335.3 (200.5) 134.8 2.5 (43.6) (36.9) 56.8 (0.4) 70.3 (4.2) 64.4 50.8

2011E 384.0 (230.2) 153.8 1.4 (49.9) (42.2) 63.1 (0.4) 62.1 (5.0) 55.2 55.2

2012E 425.9 (254.1) 171.8 1.6 (55.4) (46.8) 71.2 (0.4) 70.2 (8.4) 59.6 59.6

Profitability Sales Gth YoY EBITDA Gth YoY Net Profit Gth YoY Gross margin EBITDA margin Operating margin

2008A 18% 40% 18% 33% 15% 12%

2009A -1% 6% 26% 35% 16% 14%

2010E 13% 25% 33% 40% 18% 17%

2011E 15% 11% 9% 40% 17% 16%

2012E 11% 12% 8% 40% 18% 17%

Dupont Analysis Leverage A/E (x) Asset Turn S/A (x) Net margin ROE ROA

2008A 1.32 0.87 10% 12% 9%

2009A 1.27 0.81 13% 14% 10%

2010E 1.36 0.74 15% 16% 11%

2011E 1.37 0.75 14% 15% 11%

2012E 1.38 0.75 14% 15% 10%

2008A 28.6 59.9 5.2 76.9 107.8 65.9

2009A 73.6 59.5 6.5 55.3 102.8 67.1

2010E 145.6 75.9 9.2 68.9 106.7 47.3

2011E 161.2 92.1 15.8 82.0 110.3 47.3

2012E 184.5 108.0 19.8 97.4 113.6 47.3

Valuation PER (x) PBR (x) EV/EBITDA (x) Dividend yield PER -FD (x) ex-cash

2008A 14.6 1.70 9.4 2.0% 12.05

2009A 11.4 1.52 7.8 3.2% 7.45

2010E 8.6 1.32 5.0 4.8% 4.66

2011E 7.9 1.18 4.3 4.2% 5.43

2012E 7.3 1.06 3.5 4.5% 5.03

23.9 35.4 5.5 3.6 15.6 249.8

19.7 40.1 2.1 2.0 13.1 277.2

32.2 71.6 2.1 2.0 13.1 320.4

42.1 77.9 2.1 2.0 13.1 357.3

52.5 87.4 2.1 2.0 13.1 397.3

2008A 34.9 (22.8) (7.9) 12.1 2.7%

2009A 66.3 (6.5) (15.1) 59.8 13.7%

2010E 61.1 24.9 (14.0) 86.0 19.6%

2011E 45.4 (8.6) (21.2) 36.9 8.4%

2012E 49.9 (8.4) (18.2) 41.5 9.5%

Liquidity Net Cash (Debt) Net Debt/Equity EBIT/Interest exp (x) Days receivables Days inventory Days payables

2008A 16.7 -6% 63.9 79 140 108

2009A 66.4 -23% 90.8 81 105 113

2010E 138.4 -42% 128.6 93 125 105

2011E 154.0 -41% 144.4 103 130 110

2012E 177.3 -43% 163.1 110 140 115

DMG Research See important disclosures at the end of this publication 9

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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DMG Research See important disclosures at the end of this publication 10