Expanding Asian Auto Brands And AI Adoption Are Expected To Support Long-Term Prospects

Catalysts

About Super Group

Super Group is a diversified logistics, fleet and automotive services company with operations across Southern Africa and Europe.

What are the underlying business or industry changes driving this perspective?

• Acceleration of new business wins in consumer focused supply chain and the rapidly scaling GLS pallet operation, which is expected to reach around 1.7 million pallets, should deepen contractual volumes and support sustained revenue growth and improved operating leverage.
• There is a structural shift in the South African vehicle market toward value and Asian brands, where Super Group has strong representation and rising new and used vehicle volumes. This is likely to underpin resilient dealership revenues and support stable to improving net margins.
• Ongoing optimization and rationalization of underperforming U.K. dealerships, including exits from loss making brands and the introduction of higher growth Chinese marques, should gradually lift divisional operating margins and protect group earnings despite a challenging regulatory environment.
• Application of artificial intelligence and automation in European supply chain operations, alongside already reduced overhead structures, is expected to convert current trading losses into better performance and narrow the gap between current returns and the group return targets, thereby supporting future earnings.
• A substantially strengthened balance sheet following major disposals, lower net gearing and improved covenant headroom provide capacity for focused bolt on acquisitions and potential share buybacks, which can enhance earnings per share and support returns on equity over the medium term.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Super Group's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 2.6% in 3 years time.
• Analysts expect earnings to reach ZAR 1.3 billion (and earnings per share of ZAR 3.83) by about December 2028, up from ZAR 803.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ZAR1.5 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from 8.0x today. This future PE is greater than the current PE for the ZA Specialty Retail industry at 9.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent structural headwinds in African commodity logistics, including low coal and copper export volumes, unresolved congestion at South African borders and ports, and the DRC cobalt export ban, could prevent a recovery in commodity transport. This would limit the ability of supply chain Africa to reverse the ZAR 160 million decline in operating profit and weigh on group revenue and earnings growth.
• Ongoing weakness in European automotive production, with United Kingdom output currently more than 50 percent below the 20 year average and at the lowest levels since 1956, may mean AMCO and Ader remain loss making for longer than expected. This could delay any margin uplift from automation and artificial intelligence initiatives and drag on group operating margins and earnings.
• Regulatory and structural shifts in the United Kingdom car market, such as stricter zero emission sales thresholds, financial penalties on manufacturers, constrained combustible engine supply and weak electric vehicle demand, could cap the growth potential of the restructured U.K. dealership network and limit the benefit from adding new Chinese brands. This would constrain dealership revenue and divisional operating profit.
• The group wide return on net operating assets of 6.5 percent remains well below the 11.2 percent target of weighted average cost of capital plus a 30 percent premium. If capital intensive growth projects like the GLS pallet expansion and elevated CapEx of around ZAR 3 billion a year do not translate into higher pricing power and volumes, the return gap may persist and hold back improvements in net margins and earnings.
• Customer disinvestment from South Africa and continued macroeconomic pressure in Southern Africa and Europe could offset the momentum in consumer focused supply chain, fleet leasing and Asian brand dealerships. This could lead to a prolonged period of flat or declining top line and limit the anticipated recovery in earnings per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ZAR18.5 for Super Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ZAR50.3 billion, earnings will come to ZAR1.3 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 26.9%.
  
• Given the current share price of ZAR18.9, the analyst price target of ZAR18.5 is 2.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.