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.

Source: Mercury Securities Research - 8 Nov 2024