● Supreme Consolidated Resources Berhad is a prominent player in the fast-moving consumer goods (FMCG) sector, primarily engaged in the (i) distribution of frozen and chilled food products, (ii) ambient food products and (iii) non-F&B products across East Malaysia.

● We project a 3-year earnings CAGR of 7.8%, with core PATMI expected to reach RM11.4m, RM11.8m, and RM12.2m over the next three years. This growth is underpinned by (i) widening distribution channels into Sabah, (ii) new warehousin

● Thus, we derive a fair value of RM0.40 for Supreme Consolidated Resources Berhad, indicating a 60.0% upside from the IPO price of RM0.25, based on a P/E multiple of 14.7x pegged to FY25f core EPS of 2.75 sen.

Investment highlights

Wide distribution channels continue to widen. The group is a market leader in the F&B distribution industry in Sarawak, covering over 3,000 customers across East Malaysia as of the LPD. With a fleet of 32 in-house vehicles, the group is able to facilitate its distributions across a diverse customer base in East Malaysia, comprising wholesalers, retailers and food service operators. Currently, 97.9% of its FY23 revenue came from Sarawak, with plans to expand into Sabah through acquisitions or organic growth in Kota Kinabalu. The group is expected to leverage its geographical advantage in East Malaysia to enhance its distribution channels and revenue base in Sabah, ultimately driving higher overall revenue for the organization.

New warehousing facility to capture a larger market. The group currently operates two warehouse facilities located in Kuching and Miri, with sizes of 7,806.1sqm (2,588 pallets space) and 1,253sqm (680 pallets space) respectively. As the group expands its distribution channels in East Malaysia, particularly into Sabah, it plans to allocate RM11.0m (62.9% of IPO proceeds) towards constructing a new warehousing facility that will span approximately 2,800sqm. The group will also add an additional 1,500 pallet spaces for frozen and chilled food products to enhance its current capacity in Kuching. The expansion is expected to meet its new demand in Sabah, thereby positioning the group for increased operational efficiency and revenue growth.

Diverse product range to meet more customer needs. The group offers a wide range of products, catering to the preferences of a broad customer base, featuring 79 foreign and local third-party brands alongside three proprietary brands. To further enhance its product offerings, the group plans to secure new agency rights for both local and international products that complement its existing range. This expansion will include sourcing alternative products, such as blended butter, which are competitively priced to provide customers with additional choices.

Positive industry growth supporting company’s outlook. According to the IMR report, the F&B and discretionary products distribution services industry in Sarawak is experiencing positive growth, with the market increasing from RM14.6bn in 2018 to RM15.8bn in 2022, reflecting a CAGR of 2.0%. The industry is projected to grow to RM17.6bn by 2026, at a CAGR of 2.7%. Key growth drivers include (i) long-term economic expansion in Sarawak, (ii) population growth and (iii) rising disposable income which lead to increased consumer spending.

Company background

Started since 1984, Supreme Consolidated Resources Berhad was incorporated on 11th July 2016 as a private limited company and later converted to a public limited company on 10th July 2018. The company was then listed on the Bursa LEAP Market in 2019. Operating primarily in the consumer goods sector, it focuses on distributing third-party brands and its own products across three segments: (i) frozen and chilled food products, (ii) ambient F&B products, and (iii) non-F&B products. The Group has 1,472 third-party stock-keeping units (SKUs) sourced from 79 local and foreign brands, along with three proprietary brands comprising 55 in-house SKUs. Its customers include wholesalers, retailers and food service operators, primarily based in Sarawak.

Business overview

Frozen and chilled food products (88.3% of FY23 revenue). The group distributes a wide array of Frozen and Chilled Food Products, including frozen meat products, frozen seafood products, frozen potato-based products, frozen vegetables and fruits, frozen processed products, frozen pastries, as well as butter and cheese. While the company markets its own brands, Supreme and Best Choice, it also serves as a distributor for various third-party brands like Golden Churn, Ramly, Devondale etc.

Ambient F&B products (11.5% of FY23 revenue). The group provides a diverse range of ambient F&B products, including cream, milk, pasta, juices, bread, seasonings, and dressings. While the company markets its own SUNIFEEL brand, which features cordial beverages, it also acts as a distributor for various third-party brands like Frosty Boy, Knorr and Cyprina etc.

Non-F&B products (0.2% of FY23 revenue). The Non-F&B products segment includes cleaning and hygiene items like detergents and toothpaste, distributed by Supreme Trading after its acquisition in May 2023, allowing the company to cater to the hygiene needs of consumers in Sarawak and Sabah.

Financials

Revenue highlights. The group reported a 4.91% YoY decline in revenue, decreasing from RM210.0m in FY22 to RM199.6m in FY23. This decline was primarily driven by the frozen and chilled food products segment, which saw a 5.8% YoY decline of RM10.9m. The Group also acquired Supreme Trading in FY23 to distribute non-F&B products like detergents and toothpaste, contributing RM0.35m to revenue. Both GP margin and EBITDA were the highest in FY23, indicating improved operational performance for the Group over the years.

Earnings forecasts. Moving forward, we project a 3-year earnings CAGR of 7.8%, with core PATMI expected to reach RM11.4m, RM11.8m, and RM12.2m over the next three years, largely supported by (i) widening distribution channels into Sabah, (ii) new warehousing facility to cater to a larger market and (iii) positive industry outlook in Sarawak.

Valuations

We assign a fair value of RM0.40 per share for Supreme Consolidated Resources Berhad, representing a 60.0% upside from the IPO price of RM0.25. This valuation is based on a P/E ratio of 14.7x, pegged to FY25f EPS of 2.75 sen. We believed that the ascribed P/E is fair as the blended 12 months best P/E and historical average P/E for Bursa Malaysia Consumer Product Index ranges between 14.7-17.1x.

Investment risks

Reliance on third-party brands. The group’s operations are heavily dependent on third-party brands for all three of its business segments, including (i) frozen and chilled food products, (ii) ambient F&B products and (iii) non-F&B products, which accounted for approximately 94% of revenue in recent fiscal years. Any disruptions in business dealings with these brand owners could adversely impact the group’s operations and financial performance.

Risk of disruptions to warehousing and cold storage facilities. The group’s operations depend on the continued functionality of its warehousing and cold-storage facilities, as well as transportation vehicles. Disruptions caused by events such as fire, power failures, breakdowns, or theft could adversely impact the group’s operational efficiency.

Risk of product liability. The group’s operations involve the distribution of both thirdparty and proprietary brands, exposing it to potential product liability claims that could impact revenue and profitability. Such claims may arise from manufacturing defects, product contamination, mislabelling or the use of uncertified ingredients. While manufacturers typically bear the primary responsibility for defective products, distributors like the group may face reputational damage and legal actions that could adversely affect financial performance.

Risk of fluctuation in the price and availability of commodities. The group’s operations are subject to fluctuations in the prices and availability of commodities used in its products, including buffalo, beef, poultry, lamb and seafood. These price fluctuations can result from factors such as inflation, supply and demand changes, weather conditions and government agricultural programs. Significant volatility in commodity prices may lead to increased costs for the group’s suppliers, which could adversely affect the group’s cost of sales and overall financial performance.

Risk of negative perception and publicity. The group’s reputation is sensitive to public perception, particularly in the food and beverage distribution sector. Any incidents of product contamination, improper handling, or negative rumours can lead to significant reputational damage, affecting demand for the group’s products and potentially resulting in product recalls or administrative actions.

Source: Mplus Research - 1 Nov 2024