If you’ve downloaded and read our report on how we made 243.5% returns in two years investing in Super Group (SGX: S10), you’ll know the exact reasons why we decided to sell our stake in June 2013 even though Super’s stock price then was on a bull run; trending higher and higher.
And sure enough, Super peaked two months later and hit an all-time high of $4.97 on 13 August 2013 before heading for a massive 42.45% drop over the next nine months.
Stock chart courtesy of Yahoo Finance
So what happened?
What caused this “super” free fall? (I just had to pun…)
Well, Super’s stock price has fallen because the company failed to meet analysts’ earnings estimates causing them to downgrade its stock, spooking investors who are selling the stock in the process.
Why Have Super’s Earnings Taken Such a Hit Over the Past Year?
- Super’s Food Ingredients segment’s sales growth is slowing down. This was one of the key factors why we invested in Super back in 2011: its Food Ingredient segment sales, and especially its non-dairy creamer, were growing very fast and the company was expanding their production capacity at that point of time. Now the Food Ingredients segment’s sales growth has slowed down and production capacity for its non-dairy creamer has been stagnant since last year and is expected to remain the same in 2014.
- Long-standing civil unrest in Thailand. Thailand is the largest market for Super Group’s Branded Consumer segment. Due to the long-standing civil unrest in the country, sales have been affected pushing revenues down.
- Commodity prices are rising. Key ingredients for manufacturing Super’s instant coffee mix such as Robusta coffee beans, sugar and crude palm oil had been increasing in price affecting Super’s profit margins.
Is This an Opportunity?
Even though Super’s stock price has been on a tumble recently and looks tempting compared to its previous highs, at the current price levels I would still rather sit on the fence and wait.
But if Super meets these two criteria I might consider investing in the stock again:
- Super’s stock price continues to drop further till it reaches a point where I believe the stock is significantly undervalued
- Food Ingredient segment sales and especially its major contributor, their non-dairy creamer, starts to grow strongly again and its production capacity steadily increased. Or if another product line like their soluble coffee powder overtakes and replaces their non-dairy creamer as a major contributor for sales growth
At the moment though, things don’t look as if they’re turning around any time soon – especially with the recent developments in Thailand, so let’s just wait and see how things pan out in the next few months or so.
I am interested in this stock. May I know what is the share price to be considered undervalued?
I usually hesitate to give a target price to anyone because someone might treat it as “gospel” and expect to make money just because they simply bought a stock at a target price. The truth is that a company and the business environment it operates in is highly dynamic and always in flux. Because of this, valuation can be a tricky business and you have to sometimes boil it down to a game of probability. Of course, with rigorous research, analysis, and due diligence, your probability of making money in your investments goes up much, much more.
Another thing to consider is that “value” depends on an individual’s risk and growth appetite. You have to determine the type of investor you are and your investment goals. For example, if you’re primarily an income investor looking for dividends, then Super wouldn’t be a good investor for you; Super’s dividend yield is only 3%.
But if you’re a growth investor, Super might be a stock that fits your portfolio. Growth can be notoriously hard to project (because no one is ever certain of the future), but with a cautious approach, you can conservatively project the intrinsic value of a stock using discounted cash flow/earnings. If a stock’s current price falls below your projected intrinsic value, then you have an undervalued stock on your hands.