Valuation / Recommendation

We have a SUBSCRIBE recommendation on Supreme Consolidated Resources Berhad (SCRB) with an FV of RM0.29 based on 10x FY25F EPS, translating to 18% upside to the IPO price. Our target PE is based on the valuation of its closest peer (10.3x PE of CCK Consolidated), given the similarity of their business model and geographical locations.

Investment Highlights

Flattish revenue due to limited capacity. SCRB is a key distributor of consumer products in Sarawak (>98% of sales), which includes frozen, chilled, and ambient F&B products. The company has maintained a relatively flattish revenue trend of between RM188m-210m over the past three years, reflecting the capacity limits at its warehousing and cold storage facilities, which operate near full utilisation (~3,268 pallets). Despite the flattish revenue, SCRB has managed to improve both its EBITDA and PAT over FY21-23, helped by effective cost management and increases in average selling prices (ASP) to protect margins.

Expanding warehouse capacity by 58%. SCRB plans to utilise RM11m from IPO funds, supplemented by RM7m from either bank financing or internal funds, to expand its warehousing capacity significantly. This new facility, expected to be completed within 12 months, will add approximately 2,800 sq. m and 1,500 pallets to its branch in Kuching, raising the total pallet capacity to 4,088 (+58%). We believe this expansion will enable improved order fulfilment, positioning SCRB to better meet customer demand while reducing its reliance on costly rented storage from third parties.

Strong growth in FY25F-26F. Due to current capacity constraints, we project that SCRB’s revenue for FY24F will peak at RM227m, reflecting near-full capacity utilisation. Growth is expected to begin in FY25F, as new facilities address these limitations. Following the expansion, we anticipate a decline in utilisation rates to 75%-83% in FY25-26F, but with higher volume handled at 3,589 and 3,957 pallets, respectively. Consequently, we expect SCRB’s revenue to rise to RM249m and RM274m in FY25-26F respectively. Historically, SCRB has maintained stable margins in its distribution business, with GP margins of 10%-12% and PAT margins of 3.9%-4.6% over the past three years. We foresee gradual improvements in margins, driven by enhanced operational efficiency and lower rental costs for third-party storage.

Risk factors for Supreme include (1) Shipping disruptions and freight rates; (2) Product quality risks; and (3) Exposure to forex risk.

Financial Highlights and Valuation

Flattish revenue due to storage bottlenecks. Supreme Consolidated Resources Berhad (SCRB) has shown a flattish revenue trend over the past three years, primarily due to storage limitations. With its warehousing and cold storage facilities operating close to full capacity, SCRB had to occasionally rent additional space to meet demand. While this workaround has provided some relief, it is a costly and temporary solution that does not address the more significant issue of capacity constraints.

From FY21 to FY23, SCRB's two main facilities had a combined maximum capacity of 3,268 pallets. The primary warehouse in Kuching, which covers 7,806.1 sq. m, operated at an impressive 96% utilisation rate. In contrast, the Miri facility, spanning 1,253 sq. m, had more capacity to spare with a 60% utilisation rate. This disparity highlights a recurring challenge: Kuching facility is consistently at full capacity, while the Miri facility operates at a more moderate utilisation rate, ranging from 55% to 65%.

Resilient business. Despite flattish revenue ranging from RM188m-RM210m, SCRB has shown improvement in its net profit, which rose from RM7.6m in FY21 to RM9.2m in FY23. The company's resilient EBITDA throughout the COVID-19 period highlights its effective cost management, particularly in core warehousing operations. This efficiency is further evidenced by a consistent average ROE of 10%. To enhance its profit margins, SCRB has successfully managed rising supplier prices while also benefiting from a stronger Ringgit, given that 60% of its costs are denominated in USD.

Expanding warehouse capacity by 58%. SCRB plans to allocate RM11m from its IPO proceeds, along with an additional RM7m from bank financing or internal funds, to enhance its warehouse capacity. This new facility, expected to be completed within 12 months, will add approximately 2,800 sq. m and 1,500 pallets to its branch in Kuching, raising the total pallet capacity to 4,088 (+58%). This expansion will enable improved order fulfilment, positioning SCRB to better meet customer demand while reducing its reliance on costly rented storage.

Strong earnings growth in FY25F-26F. In light of current capacity constraints, we project that FY24 revenue will peak at RM227m (near full capacity), with growth only anticipated from FY25 onwards after new facilities alleviate these capacity limitations. Post capacity expansion, we expect the utilisation rate to trend lower at 75%-83% in FY25-26F, but with higher volume handled at 3,589 and 3,957 pallets, respectively. This shall facilitate revenue growth to RM249m and RM274m in FY25- 26F, respectively.

Historically, SCRB has maintained stable margins in its distribution business, with GP margins ranging from 10%-12% and PAT margins between 3.9%-4.6% over the past three years. Looking ahead, we anticipate gradual improvements in margins, driven by enhanced operational efficiency and a reduction in rental cost for third-party storage.

Healthy balance sheet. SCRB maintains a solid balance sheet with a healthy cash position and a low net gearing ratio of 0.16x. Cash reserves have been steady, ranging from RM13m to RM17.6m between FY21 and FY23. Post-IPO, the company is expected to shift to a net cash position, with its cash reserves expected to reach approximately RM28m over the next three years.

Attractive dividend outlook. Although SCRB has no fixed dividend policy, its strong cash flow generation allows management to consider a potential dividend payout of up to 50%. Based on this payout ratio and an IPO price of RM0.25, the projected dividend yields for SRCB could reach 5.0%- 6.4% for FY24-26F.

RM0.29 FV based on 10x FY25 EPS. We peg a target PE valuation of 10x for SCRB, which at a discount compared to the average valuation of comparable peers, but in line with a smaller capitalisation. By applying our FY25F EPS forecast of 2.9 sen, we derived an FV of RM0.29 for SCRB.

Source: Mercury Research - 8 Nov 2024