Stock Highlights

Baking fresh bread for the mass market. SDS's wholesale segment has shown impressive growth, with the segment revenue doubling in three years to reach approximately RM202m in FY24, contributing 62% of total revenue. The company mainly focuses on affordable mass-market bakery products targeted at lower-income demographics. It currently operates a fleet of 320 delivery trucks that support an extensive distribution network across Peninsular Malaysia with multiple distribution centres (in Klang Valley, Johor, Negeri Sembilan, Kedah, etc.), enabling effective outreach to smaller towns and rural areas with its Top Baker and Daily's wholesale brands. To further increase distribution frequency and drop points, SDS plans to expand its fleet by adding 20 more trucks in FY25 to more strategic regions like Klang Valley and the Northern area.

Growing its retail outlets. Largely based in Johor, SDS's bakery and café retail footprint has expanded from 34 outlets in FY22 to 40 outlets in FY24, with management targeting 3 to 5 new store openings annually. We expect its retail segment growth in FY25 to benefit from resilient consumer spending, driven by: 1) Recent civil servant pay hikes; 2) Planned increase in the minimum wage to RM1,700; and 3) Potential spillover benefits from the Johor-Singapore Economic Zone (JS-SEZ) which is set to boost tourism and foster stronger cross-border business activities in Johor.

Ready for a valuation re-rating. SDS has shown solid earnings growth over the years and maintained a healthy balance sheet with a net cash position. We believe there's room for valuation to play catch-up, as SDS currently trades at just 12.4x PE on FY25 consensus earnings, still below other listed F&B peers which are trading between 16-30x forward PE.

Momentum builds as the triangle narrows. The stock enjoyed a strong uptrend over the years and is now moving sideways within a triangle pattern. Currently trading above all three key EMAs, with an RSI at 55. An ideal entry lies between RM1.16 and RM1.19, targeting RM1.23 first, followed by RM1.29-52-week high. If buying momentum holds, a breakout to RM1.34 could be on the cards. However, a slip below RM1.11 would break the triangle pattern and signalling a shift to a downtrend.

Source: Mercury Securities Research - 22 Jan 2025