Target Price: SGD0.78
Strong Execution Lifts Margins
SSG’s 2Q13 earnings of SGD8.5m (+21% y-o-y, -19% q-o-q) were in line as strong execution lifted margins and mitigated topline weakness. Despite trimming our estimates by 8% each, the company may still achieve 13% and 12% growth for FY13F and FY14F respectively. To better reflect its cash-generative profile and SGD118m cash balance, we switch to DCF and derive a higher TP of SGD0.78. Upgrade to BUY.
• Revenue grew 9% y-o-y to SGD160m, as a SGD20m maiden contribution from Sheng Siong (SSG)’s six new stores was partially offset by a SGD7m decline in revenue at existing ones. In 2Q13, competition remained keen and traffic flow at three of its outlets – in Bedok Central, Verge and Ang Mo Kio – was affected by construction and renovation activities. Excluding these stores, same-store-sales-growth (SSSG) dipped 1.8%. SSG currently has 33 stores with 400k sq ft of retail areas (2Q12: 27 stores with 368k sq ft).
• GPM widens by 1.3ppts. The increase in GPM was mainly driven by the Group’s focus on increasing direct and bulk purchases, improving its fresh produce mix and growing profitability at new stores that commenced operations in 2H12. As a percentage to revenue, operating costs ticked up slightly to 17.3% in 2Q13 (2Q12: 17.0%).
• Tweaking estimates. We believe SSG’s long-term growth drivers from its store expansion and margin enhancement initiatives are intact. However, the competition and weakened traffic flow – especially with possible store renovations coming up – are likely to continue to weigh on its outlook. As such, we pare down our FY13F-FY14F earnings forecasts by 8% each to SGD37m and SGD41m respectively. For 3Q and 4Q, we expect earnings to stay flat at SGD9.9m and SGD8.0m respectively.
• Upgrade to BUY, SGD0.78 TP. SSG declared an interim dividend of 1.2 cents per share and is committed to raise its payout ratio to 90% for FY13-FY14. To capture the cash-generative nature of its supermarket business and SGD118m cash pile, we are switching to a DCF-based valuation (previously 24x FY13F P/E). Our SGD0.78 TP translates into a 26x FY14F P/E, with a projected dividend yield of 3.6%.
Publish date: 24/07/13