We recommend ADD for SDS with a revised FV of RM1.02 (from  RM1.15). SDS manufactures bakery and confectionery products  for distribution via wholesale and retail channels. Subsequent to our report dated 7 Dec 2022, SDS reiterated its guidance for  expansion in both its wholesale and retail segments. It is also  introducing more SKUs and acquiring land in Johor for future  expansion. We lower our earnings forecasts to reflect higher  operating cost.

Fleet expansion. Its wholesales segment contributed two thirds of  total revenue in FY22. It has a wide distribution network across  Peninsular Malaysia. SDS will be adding another 25 trucks in FY24 to  its existing fleet of 281 as at Apr 2023. The large fleet enable SDS to  increase the distribution frequencies at its established markets and  expand geographically.

More retail outlets. SDS plans to add 3-5 retail outlets (café and  bakery) in FY24 vs. 36 outlets as at end-3QFY23. The new outlet will  be located in the Klang Valley and Johor Bahru, which will be  launched by 3QCY23.

Acquiring land for future expansion. SDS recently announced the acquisition of two pieces of land measuring a total of c.6.9 acres in  Tebrau, Johor, for RM9.4m, where It plans to construct a new facility  for future demand. Meanwhile, SDS is adding 2-3 new SKUs with new  flavours to boost sales. We understand that it recently launched some  new croissant bread in Johor Bahru to gauge the response from the  market.

Forecasts. We cut our FY23F and FY24F earnings by 12% and 11%,  respectively, to reflect higher operating cost, particularly, staff cost  pursuant to the recent amendment to Employment Act that reduces  the maximum weekly working hours to 45 (from 48) and utility cost. That said, we still project the company to deliver earnings growth of  134% and 28% in FY23 and FY24, respectively.

We reiterate ADD with a revised FV of RM1.02 (from RM1.15),  premised on a 13x FY24F EPS, which is line with the domestic staple  food producer peers’ one-year PER mean of 13x. We believe this is  justified by its long-term expansion plans and affordable price  advantage for the B40 group. Nevertheless, the valuation is  considered inexpensive, reflective of high earnings growth potential  compared to consensus peers’ projection of 12% in FY23. A ROE of  c.28% also outweighs peers’ mid-teens marking. There is no change  to our TP based on ESG given a 3-star rating as appraised by us  (see Page 5).

Risks to our call include: (i) its inability to raise prices for certain  price-controlled products, (ii) low entry barriers for bread and bakery  products, and (iii) inability to make significant inroads into markets  beyond its home turf in Johor.

BUSINESS OVERVIEW

SDS is primarily involved in the manufacturing and distribution of bakery products through its retail and wholesale networks. The group produces varieties of loafs, breads, buns, rolls and cakes which are distributed across Peninsular Malaysia under brand name of “Top Baker” and “Daily’s”. Also, its retail segment which mainly operates F&B outlets under “S.D.S” brand within high footfall neighbourhood areas to distribute baked goods and confectionery products.

BUSINESS SEGMENTS

• Wholesale of baked products via supermarkets, chain value stores and grocery stores

• Selling of bakery goods as well as confectionery products through its F&B outlets with a variety of coffee and meal offerings.

Source: Kenanga Research - 18 May 2023