• FV of MYR1.01 is based on 13x FY25F (Mar) P/E, which is on par with the sector average. SDS Group’s solid 13% 3-year earnings CAGR should be underpinned by the robust expansion in both its operating divisions to capture the rising demand for bakery products. It is trading at an undemanding valuation, despite a solid track record in delivering earnings growth and solid fundamentals (sturdy balance sheet, experienced management team), as well as it benefiting from the resilient consumption of bakery products as a staple food.

• Twin engines to capture demand for bakery products. SDS began as a bakery back in 1987, and has grown into a household name in Johor after decades of expansion. Essentially, we believe there is steady consumption growth in the bakery industry – driven by the rising demand for quality and conveniently-packaged bakery products on the back of increasingly busy lifestyles, urbanisation, and growing affluence. Strategically, SDS runs two business units – wholesale and retail – to capture this growing demand. We also believe the synergistic benefits will strengthen the competitiveness of the group.

• Wholesale: Ramping up capacity to deepen market penetration. SDS has been expanding its delivery fleet and distribution centre network to increase drop points and extend its reach to more consumers. Playing a second-liner role to the larger industry players is a blessing in disguise, as it allows SDS to venture deeper into more rural locations where the latter are not prioritising. In addition, SDS has seen positive results in launching new products to entice consumers and raise its brand equity. Meanwhile, price increases to maintain the price gaps vs major competitors should help preserve margins, while being further aided by stabilising input costs.

• Retail: Continues to offer a value-for-money proposition. We believe management is taking a prudent and selective approach on expansion by targeting 3-5 new stores being opened each year. The company continues to see opportunities in Johor (33 outlets) to leverage on its entrenched brand equity, whilst the strong spending power of visitors from Singapore is also a key driver. That said, its proven business model in offering quality bakery and café food at reasonable prices is mature enough to be replicated in the major Kuala Lumpur and Selangor markets (4 outlets) to extend its retail footprint. We also like the hybrid format in placing the bakery and café under one roof (17 outlets) for cross-selling opportunities and offering more convenience to consumers.

• Downside risks to our outlook for the company include intensifying competition and a sharp rise in production costs.

Source: RHB Securities Research - 20 Dec 2023