Is SDS Group an investment opportunity?

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Value Investing Case Study 83-1: A fundamental analysis of SDS Group Bhd  to see whether it is a value trap or an investment opportunity.  

Is SDS Group an investment opportunity?
With a focus on retail and wholesale segments, SDS Group Berhad (SDS or the Group) has successfully navigated the challenges of a mature bakery market. It achieved a 15.4 CAGR of 15.4 % in revenue and an impressive 30.5 % CAGR in PAT over the past decade. 

A strategic emphasis on operational efficiency and cost management underpins this growth. This has enabled the Group to enhance profit margins while expanding its footprint across Peninsular Malaysia.

As the bakery market evolves, SDS stands at the forefront, leveraging its established brand presence and operational strengths to capitalize on emerging opportunities. 


Join me as I assess SDS's fundamental soundness and explore its financial health, growth potential, and strategic positioning within the competitive landscape. 

My findings suggest that it is fundamentally sound. But your entry price will depend on your risk tolerance as its market price has gone up by 1/3 over the past 6 months.

Should you go and buy it? Well, read my Disclaimer. 

Contents

  • Company background
  • Operating performance
  • Financial position
  • Valuation
  • Conclusion
This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

Company background

SDS is primarily involved in the manufacturing and retailing of bakery products. It was listed on the ACE Market of Bursa Securities in 2019 and transferred to the Main Board in 2023.

Established in 1987, SDS grew from its Johor home base to throughout the Peninsular of Malaysia with three brands, namely the retail brand “SDS” and two wholesale brands, “Top Baker” and “Daily’s”.

As can be seen from the left part of Chart 1, the Group has 2 main operating segments – Retail and Wholesale. 
  • The Retail segment manufactures and sells products via retail outlets operated under three different concepts namely, bakery, cafeteria, and bakery-cum-cafeteria. 
  • The Wholesale segment offers products for the mass market across the Peninsula of Malaysia and Singapore. The segment produces and distributes its products via its distribution network, which is supported by its in-house team of logistics personnel.

From a revenue perspective, the Wholesale segment is the bigger contributor. But from a growth rate perspective, the Retail segment had a higher CAGR compared to the Wholesale segment over the past 6 years.

At the same time, the Retail segment has a better profit margin. From 2019 to 2024, the average profit margin for the Retail segment was 14.9 % compared to 7.5 % for the Wholesale segment.

The bulk of the Group’s revenue is derived from Malaysia as illustrated in the right part of Chart 1.

Note that SDS’s financial year end is in March. Unless stated otherwise, the years in this report refer to the financial years. In this report, the 2025 performance was based on the Sep 2024 LTM results.  

SDS Chart 1: Revenue profile
Chart 1: Revenue profile

SDS operates in a mature market with a single-digit growth rate:

“Malaysia bakery products market was valued at RM 3,140.3 Million in 2023 and is projected to reach RM 3,788.9 Million by 2029” Precision Business Insights. This is equal to 3.2 % CAGR.

“Revenue in the Bread & Bakery Products market (Malaysia) amounts to US$7.77bn in 2024. The market is expected to grow annually by 5.59% (CAGR 2024-2029).” Statista

Operating performance

Despite operating in a mature sector, SDS delivered a double-digit revenue growth rate over the past decade. Furthermore, while revenue grew at 15.4 % CAGR, PAT grew at a much faster rate of 30.5 % CAGR.

Part of the revenue growth came from the net opening of new stores. The Group did not provide data on the number of F&B outlets in the Annual Reports. But I guesstimated that there was a net opening of new stores over the past decade:
  • On its website, the Group listed 36 F&B outlets as of 23 Dec 2024. Of these, 8 were in non-Johore states. 
  • When the Group IPO in 2019, it reported 33 F&B outlets, all in Johore. 

SDS Chart 2: Performance Index and Returns
Chart 2: Performance Index and Returns
Note that the 2025 performance was based on the LTM Sep 2024 results.

More significant was the growth in PAT. You can see from the left part of Chart 2 that there was a significant spike in 2023. This was attributable to higher sales and better gross profit margins as illustrated by the following extracts from the 2023 Annual Report:

“The driving factor for the higher sales has been the uplifting of movement controls at the country’s borders as well as the increased options for value-for-money bakery products...” 

“Improvement in gross profit margin…efficient control over administrative and selling and distribution expenses have all contributed…In addition, the Group’s finance cost has decreased…" 

The improving profits led to improving returns as shown in the right part of Chart 2. Over the past decade:
  • ROIC averaged 15.0 % compared to the current WACC of 9.5 %.
  • ROE averaged 15.8 % compared to the current cost of equity of 9.7 %.

With the returns greater than the respective cost of funds, SDS created shareholders’ value. 

Efficiencies

Notwithstanding the revenue and profit growth, capital efficiency as measured by gross profitability only grew at 2.3 % CAGR over the past 10 years. I thought it was low given the company’s emphasis on efficiency.

“SDS has embraced innovation, technology, and cost management to drive efficiency of operations and hence manage cost competitiveness in light of escalating prices.” 2024 Annual Report

“These continuous improvements will ensure the Group achieves economies of scale and efficiency in distribution across this segment.” 2023 Annual Report

To see whether these efforts have been translated into tangible results, I carried out the following analyses.
  • I broke down the operating profits into fixed and variable costs as shown in the left part of Chart 3.
  • I broke down the ROIC into various components as shown in the right part of Chart 3.
  • I looked at the trends for several operating and capital efficiency metrics as shown in Chart 4. 

SDS Chart 3: Operating Profit and ROIC Drivers
Chart 3: Operating Profit and ROIC Drivers
Note to Op Model. I broke down the operating profits into fixed costs and variable costs.
  • Fixed cost = SGA, Depreciation & Amortization and Others.
  • Variable cost = Cost of Sales that excluded Depreciation & Amortization.
  • Contribution = Revenue – Variable Cost.
  • Contribution margin = Contribution/Revenue.

SDS Chart 4: Efficiency trends
Chart 4: Efficiency trends

The findings are that SDS has made strides in operating efficiency, reflected in rising margins and ROA. But capital efficiency needs further improvements, particularly in maintaining stable cash flows.
  • Contribution margin shows an improving trendline. There has also been a decline in the SGA margin averaging 24% in 2016 to 2018 to an average of 20% in 2023 to 2025.
  • Operating efficiency has improved, particularly since 2021, driven by higher profitability and asset utilization while keeping expenses stable.
  • Capital efficiency shows mixed performance. While asset turnover has steadily improved, free cash flow generation remains inconsistent and may require better cash flow management practices to sustain long-term growth.

With the positive trends outweighing the negative ones, I would state that the Group is better off today than a decade ago.

Reinvestment

Growth needs to be funded and one way to assess this is the Reinvestment rate defined as Reinvestment/NOPAT.

Reinvestment = CAPEX & Acquisitions – Depreciation & Amortization +  increase in Net Working Capital. 

Over the past decade, the Group had a negative Reinvestment rate. The negative rate suggests that the amount spent on CAPEX is much less than the Depreciation. 

While this is good, over the long run, Reinvestment will follow the fundamental growth equation of 

Growth = Return X Reinvestment rate.

If we assumed that the Group will grow at 4% over the long run with the historical 15 % average ROIC, then the Reinvestment rate should be 0.04/.15 = 27 %.

In other words, I expect that eventually, the Reinvestment rate would have to increase from a negative rate to one linked to the fundamental growth equation. 

Peer comparison

I compared NHF's performance with several Bursa companies in the snacks, confectionery, and bakery sectors. 

You can see from Table 1 that SDS 2023 revenue was lower than the peer average. However, it had the best revenue growth rate from 2016 to 2023. 

SDS Table 1: Peer revenue
Table 1: Peer revenue

I looked at the trends of 4 metrics to get a sense of how well SDS performed compared to its peers. Refer to Charts 5 and 6. 

Overall, while SDS shows strengths in return on capital and recent improvements in EBIT margin, it faces challenges in EPS performance and has average cash flow generation.
  • SDS had one of the better return-on-capital especially post-2021.
  • SDS’s EBIT margin was among the worst, especially in the initial years. But there seems to be some improvement since 2022.
  • SDS had an average levered Free Cash Flow margin.
  • While SDS had the best EPS before 2019, it became among the worst thereafter.

Based on the above I would rate SDS performance to be a "C" from an overall perspective:
  • Strengths - Strong return on capital (especially post-2021) and improving EBIT margin since 2022.
  • Weaknesses - Average leveraged free cash flow margin and a significant decline in EPS performance post-2019.

SDS Chart 5: Bursa Peer Return on Capital and EBIT Margin
Chart 5: Bursa Peer Return on Capital and EBIT Margin

SDS Chart 6: Bursa Peer Levered Free Cash Flow Margin and EPS
Chart 6: Bursa Peer Levered Free Cash Flow Margin and EPS

Case Notes

SDS has several growth options. Given its higher CAGR in the Retail segment, this area may offer more significant growth potential despite lower current revenue compared to wholesale. Focusing on retail could enhance brand loyalty, customer engagement, and adaptability to market trends. 

However, the Wholesale segment remains vital due to its revenue contribution and scalability. A balanced approach that leverages the strengths of both segments may provide the most sustainable growth strategy.

In analyzing the growth differences between focusing on retail versus wholesale for SDS, we should consider the following:
  • Market dynamics. The Retail segment is likely more responsive to consumer trends and preferences while the Wholesale segment may be limited by market saturation or reliance on existing distribution networks.
  • Investment and resource allocation. F&B outlets require significant investment in store locations, design, and customer service. Wholesale often benefits from economies of scale, requiring less investment in customer-facing infrastructure.
  • Profit margins. Retail generally has higher margins but may face higher operational costs. While Wholesale has a bigger volume, its margin is lower.
  • Scalability. Expanding retail operations can be challenging due to location and staffing needs. Generally, wholesale operations are more scalable since they can leverage existing logistics and distribution networks to reach broader markets without the need for physical storefronts.

As you can see, there are many issues to consider when looking at growth. That is why you need to carry out a fundamental analysis rather than just rely on trend projections. This requires expertise and time. 

That is why I created the Fundamental Mapper to shortcut the process. You can see the position of SDS as of 7 Jan 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies.

  

PS: The Fundamental Mapper gives you a first-cut picture. For companies falling into the Goldmine quadrant, it is an obvious choice. The fundamental analysis presented in my article provides a more nuanced picture of the investment opportunity. 




Financial position

I would rate the SDS as sound financially based on the following:
  • As of Sep 2024, it had RM 42 million cash. This is equal to 19 % of its total assets. 
  • As of Sep 2024, it had a debt-capital ratio of 13 %. This has come down from its 2017 high of 65 %.
  • Over the past 10 years, it generated positive cash flow from operations every year.
  • From 2016 to 2025, it generated RM 307 million cash flow from operations compared to the total PAT of RM 140 million. This is a very good cash flow conversion ratio.
  • It had an average negative Reinvestment rate over the past decade.
  • It had a good capital allocation plan. Refer to Table 2. The cash flow from operations was sufficient to fund its CAPEX with excess used to reduce debt and for dividends.

SDS Table 2: Sources and Uses of Funds 2016 to 2025
Table 2: Sources and Uses of Funds 2016 to 2025

Valuation

I adopted the following picture in valuing SDS.

I assumed that it has reached maturity with the 2025 revenue as the base with a perpetual growth rate equal to the long-term GDP growth rate of 4%. This is not unreasonable as the revenue growth rate for 2025 had slowed down to 5.5 % compared to the 15.4 % CAGR over the past decade.

I assumed that there was no improvement in the operating and capital efficiencies. As such I considered the 2019 to 2025 (post-IPO) average contribution margin and capital turnover to be the base values. At the same time, the Reinvestment rate will follow the fundamental growth equation.

On such a basis, I obtained an intrinsic value of RM 1.53 per share.  Its market price was RM 1.23 per share (23 Dec 2024), providing a 25 % margin of safety.

I would not be too excited about the margin of safety as my valuation is an aggressive one. This is because I have the picture shown in Chart 7 when I compared the results of my valuation model with the historical results. 

The Free Cash Flow to the Firm (FCFF) used in the valuation model is shown by the grey line in the right part of Chart 7. You can see that it is much higher than the log-normal trendline projection based on the historical data (shown as a dotted blue line).

One of the reasons for the higher FCFF in the valuation model is because of the higher revenue. Refer to the left part of Chart 7. This in turn led to higher contribution and profits.

SDS Chart 7: Projections
Chart 7: Projections

Furthermore, based on the valuation model,
  • The ROIC would be 27 % compared to the post-IPO average of 17 %. To be fair, the average ROIC for the past 3 years was 28 %.
  • The average EPS would be RM 0.10 per share compared to the post-IPO average of RM 0.05 per share. The average EPS for the past 3 years was RM 0.075 per share.

Valuation model

I valued SDS based on a single-stage valuation model as shown in Table 3. 

The basic equations used in the model are:

FCFF = EBIT(1 – t) – Reinvestment.

EBIT = Revenue X Contribution margin – Fixed cost. The earning was based on the business model shown in the left part of Chart 3.

Reinvestment was derived from the Reinvestment margin.

SDS Table 3: Sample calculation
Table 3: Sample calculation 

The cost of funds was based on the first page results of a Google search for “SDS Group WACC”. Refer to Table 4.

SDS Table 4: Estimating the cost of funds
Table 4: Estimating the cost of funds

Risks and limitations

SDS does not look cheap when I look at other valuation metrics as illustrated in Table 5.
  • It is trading at 3.5 times Book Value. I consider this high for a brick-and-mortar company. 
  • There is also no margin of safety based on the Acquirer’s Multiple and Free Cash Flow yield.

SDS Table 5: Other valuation metrics
Table 5: Other valuation metrics
Notes
a) EV / (average 3 years Op profit + Depreciation).
b) Historical Ave Free cash flow/market price.

On the other hand, there are potential upsides. For example, you could argue that it could continue to grow at a higher revenue growth rate for a few more years before reaching maturity. At the same time, I have not factored in the potential improvements in operating efficiencies.

I would obtain an intrinsic value of RM 2.39 per share if I used a 2-stage valuation model with the following optimistic assumptions.
  • Revenue growth will start at 8% and reduce proportionately to the perpetual growth rate of 4% in Year 6.
  • There will be a 10% improvement in the contribution margin in Year 6, with proportionate improvements from Year 1 to Year 6.
  • With the improvement in the contribution margin, the Reinvestment rate following the fundamental growth equation would reduce to 11 % in Year 6. It was 15% in the valuation model shown in Table 3.

I am a conservative investor and as such I would not consider this potential upside picture. This is especially true when I noted that the share price has gone up by 1/3 since Aug 2024. Refer to Chart 8. So, I prefer to sit on the sidelines and wait for a better entry price.

SDS Chart 8: SDS market price
Chart 8: SDS market price

Conclusion

I would assess SDS as fundamentally sound with strong growth metrics, improving profitability, and solid financial health. 
  • SDS reported impressive growth with a 15.4% CAGR in revenue and a 30.5% CAGR in Profit After Tax (PAT) over the past decade. 
  • Although operating in a mature market, SDS has outperformed the sector’s average growth rates, indicating effective strategies and market adaptability.
  • It is financially sound.
  • It has growing returns and has managed to create shareholders’ value.

However, there is not enough margin of safety at the current market price. I would wait for the price to drop by about 15% before buying. 

Investment thesis

SDS has established itself as a leading player in the Malaysian bakery market. This strong market presence, together with its good track record of revenue and profit growth, provides a solid foundation for growth. There are also signs of improving operating efficiency suggesting that the uptrend in returns can be sustained. The Group is also financially sound.

While challenges exist, particularly regarding capital efficiency and being in a mature market, the company's strategic focus on balanced growth and adaptability provides a solid foundation for future success. SDS is a viable investment opportunity but the entry price will depend on your risk tolerance. 




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Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.







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