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SDS Group Berhad - Seeking Listing on ACE Market

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SDS is a Johor-based manufacturer and distributor of bakery products which also operates F&B outlets. Seeking listing on ACE market in early October, it is raising RM24.0m with an enlarged market cap of RM93.3m upon listing, with bulk of proceeds allocated for working capital and nationwide expansion. Moving forward, we expect the group’s expansion plans to face challenges in the face of a highly competitive business environment. Hence, the stock is Not Rated with an ascribed TP of RM0.245, based on 12x PER on FY21E earnings.

Baking since 1987. Seeking listing on the ACE market, SDS Group Berhad (SDS) is primarily engaged in the manufacturing and distribution of bakery products in the wholesale and retail channels alongside operating a chain of F&B outlets in Johor. For its wholesale channel, a range of breads, buns, rolls and cakes are sold through the group’s own brands (“Top Baker” and “Daily’s”). Meanwhile, the group has established its footprint of 33 F&B outlets (bakery, café and bakery-cum-café) under its original brands of “S.D.S” and “Fanpekka Café by S.D.S”, offering bakery, confectionery and other F&B products. As at FY19, revenue is primarily derived from Malaysia (c.91%) while the wholesale segment contributed 70% to the company’s gross profit.

Expanding footprints outside Johor. Of the RM24.0m raised through the IPO proceeds, 25% is earmarked for expanding their geographical outreach specifically in the northern and central regions of Peninsular Malaysia. The 2- year expansion plan will be executed through: (i) purchase of additional 18 lorries to expand its wholesale distribution network, mainly for the northern region, and (ii) opening of 8 new F&B outlets in Klang Valley which will be the group’s maiden venture into the central region’s F&B scene. Besides, 33% of the IPO proceeds will also be utilised for the group’s general working capital to ease cash flows and to further supplement its expansion plans. In addition, RM7.0m will be allocated to repay bank borrowings with the balance of RM3.2m will be utilised to settle listing expenses.

Beyond the IPO. With the funds to be raised from the IPO to enhance its distribution fleet, the group seeks to separately propel their north-bound expansion by setting up two new depots in Penang and Kedah via internal funds. The group’s strategically located plant in Seremban (currently at c.63% utilisation rate) could also offer sufficient production capacity to supply to the new markets. Management aspires for the first depot in Penang to roll out earliest by 3Q20.

Competitive landscape. While we expect the group’s earnings to be lifted by its expansion plans over the next two years, we opine that its geographical expansions will likely be challenging due to the existing strong brands in the market (i.e. Gardenia, Massimo and Mighty White). On top of that, the entry of its 8 new F&B outlets into the Klang Valley is also likely to face some resistance in the near to mid-term due to the highly competitive nature of the business landscape, where consumers are already spoilt for choice.

Earnings forecast. Taking into account the additional sales from the new markets as a result from the fleet expansion and new outlets opening, we are forecasting 9% and 11% revenue growth for FY19 and FY20, respectively. We are factoring in lower EBITDA margins on the back of the start-up costs incurred for the new F&B outlets and higher depreciation costs for its new fleet. Meanwhile, interest savings from the repayment of bank borrowings prompted us to reflect lower interest expenses, leading to a slight expansion in net margin. Allin, we are forecasting SDS to register a core net profit of RM7.2m (+14%) and RM8.1m (+12%) in FY19 and FY20, respectively. Overall, we paint a cautious outlook for the group, banking on its know-how in building brand equity, as was done in the Johor market, to contribute positively amidst a challenging market. We also note that the company does not have a dividend policy at this juncture and we also do not expect any dividend pay-out in the near future given that the group will likely reinvest into its expansion plans.

Fairly valued at RM0.245; Not Rated. SDS is offered at FY19 earnings multiplier of 12x. Nonetheless, we believe the offer price is justified by SDS’s relatively smaller market cap and the absence of dividend. We value the new issuance at 12x FY21E PER, which is cheap against a discount to the average 15x Fwd. PER amongst close peers (HUPSENG, OFI, APOLLO and COCOALAND) to derive a fair value of RM0.245 against its IPO issue price of RM0.230. In view of the limited upside potential, SDS is a Not Rated stock. Downside risks include lower-than-expected earnings growth and slower-thanexpected implementation of expansion plans.

Source: Kenanga Research - 20 Sept 2019

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