My Take on Super Group and OSIM

 

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Super Group and OSIM have been market darlings over the past few years due to their strong growth in revenues and earnings. The both of them are also in my watchlist as they display characteristics which I like – Growing revenues & earnings, low debt (or net cash in this case), high ROA & ROE figures and a strong management which has shown their capabilities over the years. Nevertheless, they were priced at high PEs of over 20 for Super and close to 20 for OSIM, which made me uneasy as there was very little margin of safety. This year however, the stock prices have deteriorated greatly due to a poor earnings showing.

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One issue which made me uncomfortable with the high PEs were the nature of their businesses. Super competes mainly in the instant coffee industry in Southeast Asia, where competition is fierce from the local players. One thing that bothered me was the lack of a focused brand that encompasses the group. The company has many brands under its stable, including mainstays like the Super and OWL brand of coffee, and others like Cafe Nova and YeYe, etc. The brands strike me as isolated and lacking a sense of focus, unlike its competitor Oldtown Coffee. In my personal opinion, Oldtown Coffee has a superior brand value to Super’s various brands as it has a strong history and story to tell. Its products are all focused on the Oldtown brand, which targets the niche market of White Coffee. Its restaurants also complement the brand and its heritage, where people can experience the traditional Ipoh Coffeeshop experience. If one were to think of Oldtown, it is likely that they will associate it with White Coffee or their traditional Malaysian food. In Super’s case, I feel its harder to form such an association. Moreover, the changing tastes and consumption preferences of the young generation now in Southeast Asia seems to be converging towards western coffee products, like Starbucks or Nescafe in the ready to drink segment. From my earlier scuttlebutt into Food Empire’s key market in Russia, a local friend mentioned to me that Nescafe has been marketing its products more intensively than its peers, and has been the more popular brand around. As such, I believe it is even more pertinent to focus on a niche market and excel in that when coming up against the big players.

Since the start of the year, Super’s share price has plunged from a high of $2 to a low of $1.10 due to 6M14 earnings dropping by 43% and subsequent re-rating of its target price by brokerages. External factors were blamed, like a drop in consumer demand in Thailand (Super’s largest market) due to the civil unrest there, rising commodity prices and a slowdown in the ingredients division. Moreover, the company has been losing market share in its markets due to more aggressive competition from local players in an industry where the barriers to entry are low. Nevertheless, Super Group still remains an attractive stock due to its capable management, a strong dividend history, its distribution network in Southeast Asia and its sturdy balance sheet which gives it the support it needs to drive growth. If Super is able to show signs that it can remain the market leader in Southeast Asia, penetrate the China market successfully, and should its stock price remain depressed, it might get really attractive then. Meanwhile, I’ll wait on the sidelines and monitor the progress of its business.

As for OSIM, profit after tax dropped by 28% y-o-y in 3Q14. This was attributed to higher startup and legal costs pertaining to its TWG division, as it executes its growth plans while battling a legal dispute. This drop in earnings came on the back of 22 consecutive quarters of record profit, a feat which is pretty amazing, in my opinion. However, the market didn’t take too well to the dent in its growth by selling its shares from a high of $2.90 this year to a low of $1.69. Similarly, OSIM has shown steady revenue and earnings growth, coupled with a strong balance sheet of around $272 million net cash. Its convertible bond issue of $170 million comes at a low annual interest rate of 2%, which I feel is a good deal for the company. However, similar to Super Group, although its financials look robust, the nature of its business is the one that concerns me. OSIM operates mainly in the luxury goods market, where its products are consumer discretionary in nature. In a booming market, its business might do well as consumer affluence and spending increases. However, in bad times, its business could be severely affected as well. On this note though, it is pretty impressive that OSIM managed to remain profitable during the GFC (excluding its losses in Brookstone), and was growing strongly in 2009. If there’s one thing that can be gleaned from the GFC, I think it would be the resilience of its management. Nevertheless, OSIM’s main product – the massage chair, is a machine that one would not buy often, ie. repeat customers might be rare as a massage chair is usually expected to last for years. As a result, I think OSIM has to constantly rely on new customers to drive its OSIM division. Another point I find intriguing is that I rarely see customers in OSIM and GNC stores. It might take only a few customers a month to be profitable for OSIM stores, but I feel that the GNC business may be heavily threatened by the growth of online retail. OSIM still remains attractive as I see it as a collection of luxury brands that cater to the health and wellness industry. It is the leader in its niche market of massage chairs, and has the potential to be one in the luxury tea segment as well.

Super Group is currently trading at a ttm PE of 18.3 while OSIM is trading at a ttm PE of around 13, a huge fall from their previous PE ratios. Current dividend yield is 4.2% and 3.3% respectively. These two incidents have shown how high PE stocks might crash due to a double whammy of lower earnings and a re-evaluation of its earnings growth.This brings me to the notion of having a margin of safety in investing. I hope to be more disciplined when it comes to imposing a margin of safety, and to analyse the qualitative aspects of a business more when researching the company. Both stocks still remain on my watchlist as of now, and I may sow the seeds in the near future if I’m vindicated enough.