SDS’s business in the southern region are considerably stable and it intends to set up 2 depots in the northern region (Penang and Kedah), adding on with 18 new delivery vehicles as well as 8 new F&B outlets in the Klang Valley with its IPO proceeds. While SDS is on an expansionary mode, we are projecting a core net profit to decline by 16.0% in FY20 to RM4.7m, before growing 41.5% to RM6.6m in FY21 supported by its expansion plans over the next 2 years. Hence, we derive a fair value of RM0.26, based on 16.0x PE (c.25% discount from peers average of 21.5x) tagged to FY21 EPS of 1.6 sen.

Established brand names... Established in 1984, SDS Group (SDS) is principally involved in (i) wholesale - manufacturing and distributing (over 10k customers) of bakery products (breads, buns, rolls and cakes) under the brand name of “Top Baker” and “Daily’s” and (ii) retail - operating 33 food and beverages (F&B) outlets in Johor under the brand name of “S.D.S” and “Fanpekka Café by S.D.S”.

…with its in-house logistic capabilities. Its sizeable fleet (270 1-tonne delivery vehicles), in-house team of 280 logistics personnel and 19 depots within Peninsular Malaysia are ready to support the distribution for the wholesale and retail operations.

Rolling out with new products which are halal certified. SDS constantly rolls out with new products to attract and retain customers in the long run. Eventually, new products that have high acceptance rate will be added to its permanent products offerings. In addition, SDS obtained both Certification of Halal and MeSTI certification for its bakery products to ensure the safety in its manufacturing plants and to guarantee the products comply with the Islamic dietary requirements

Central kitchen to ensure uniformity and quality. SDS embarks on a “hub-and spoke” model, which involves the centralisation of core production functions at it central kitchen to supply its products to all the F&B outlets.

Bakery products industry outlook a function of growing population. According to the Protégé Associate market research, the bakery products market in Malaysia is likely to grow at a 5-year CAGR of 5.9% to RM4.97bn by 2023, underpinned by factors such as changing food consumption trend, preference for conveniently-packed food products, growing affluence of Malaysians as well as a steady population growth.

Expansion plans for its wholesale and retail reach. SDS intends to set up 2 depots (Penang and Kedah) and add 18 new delivery vehicles to support the northern expansion. Also, SDS will be opening 8 new F&B outlets in Klang Valley.

Forecast. While SDS will be in an expansionary mode, we project core net profit to decline by 16% to RM4.7m in FY20 on the back of the start-up phase and higher operating cost for the F&B outlets. However, we forecast core net profit to grow by 41.5% to RM6.6m in FY21 supported by the retail and wholesale expansion plans in the next 2 years, which may capture new customers moving forward.

Fair value of RM0.26. Based on the IPO price of RM0.23, SDS is priced at FY20-21 (FYE: Mar) P/E of 20.0x and 14.1x, respectively. However, in light of FY20 being a “gestation period” (i.e. setting up the retail café and expansion in the wholesale segment), we value the stock based on EPS FY21 of 1.6 sen instead. We have extracted similar peers from the consumer sector and most of the revenue and income base is higher. To reflect its smaller revenue and net income base, SDS could be valued at PE multiple of 16.0x (c.25% discount to its peers average PE of 21.5x), leading to a fair value of RM0.26.

Source: Hong Leong Investment Bank Research - 10 Oct 2019