SINGAPORE (Feb 6): Super Group is on its way to a recovery in almost all its major markets this year, although Malaysia could still pose challenges to the instant beverage maker as the country prepares to introduce a goods and services tax (GST) while grappling with a weakening currency, says Maybank Kim Eng.

3Q2014 likely marked the bottom for Super's sales and margins, Maybank Kim Eng analyst Gregory Yap wrote in a note. "Its momentum should gather pace."

The company is likely to report core earnings of $17 million for 4Q2014, down 23% y-o-y but up 74% q-o-q, according to Yap. The results are due later this month.

He expects gross margins for the quarter to rebound to 37.5% from 32% in 3Q2014 on the back of lower prices of raw materials such as coffee and palm kernel oil.

Prospects in Malaysia, one of its key markets, are less certain though.

"Malaysia could be a more troublesome market this year owing to its upcoming GST introduction and the severe weakness of the ringgit," said Yap.

The Malaysian currency has fallen more than 8% against the Singapore dollar, Super's reporting currency, he noted, adding that operating costs in Malaysia remain high following government cuts in sugar and fuel subsidies in 2013.

In the meantime, there is still much uncertainty over Malaysia's GST, which will take effect from April 1, he said.

"We understand that companies are still trying to establish whether their products will be exempted from GST. If not exempted, they are figuring out how to pass on the higher cost.

"If competitive forces do not permit, most may have to absorb the tax."

For Super, the list of GST-exempt items released by the Malaysia Attorney-General’s Chambers is rather vague on coffee and tea products, he said, noting that while these items are mentioned, it is not clear whether instant coffee and food ingredients such as botanical tea extracts are affected.

"It would certainly be good news if its products are GST-exempt. But even then, we understand there may be a revenue cap on GST-free items, beyond which they will attract tax.

"There could be backlash against brands that choose to pass on (the tax to consumers) if the prices of competing or alternative products stay put. This would slow down sales in the initial months after GST’s debut."

On the other hand, Super's margins will be diluted in the near term if it chooses to absorb the GST temporarily, he added.