Sheng Siong Group:
Fair value S$0.78
add: 12m dividend forecast S$0.02
versus: Current price S$0.63
Stable 3Q13 results
• Highest net profit since 1Q12
• Margin stability as expected
• Willingness to buy store locations increases options
Sheng Siong Group’s (SSG) 3Q13 results were in-line with our expectations as revenue grew modestly by 4.8% YoY to S$177.8m, gross and operating profit improved to S$41.2m and S$12.6m, respectively, despite higher operating expenses, and 3Q13’s net profit of S$10.6m was the highest for the group since 1Q12.
Although the group has yet to add new stores for FY13 thus far, we are encouraged by management’s willingness to consider outright store location purchases, which will open up additional opportunities for the group to expand its presence. For the immediate 4Q13, we are unconcerned by the seasonal weakness, and we expect SSG to actively add stores by early FY14. Maintain BUY on SSG with an unchanged fair value estimate of S$0.78.
3Q13 results in-line with expectations
Sheng Siong Group’s (SSG) 3Q13 results met our expectations. Revenue grew modestly by 4.8% YoY to S$177.8m as full-year contributions from stores opened last year helped to offset lower same-store sales in areas affected by ongoing renovation works and older housing districts. Despite higher operating expenses related to wages and rental, gross and operating profit improved 6.1% and 5.7% YoY, respectively, to S$41.2m and S$12.6m, respectively. In fact, 3Q13’s net profit of S$10.6m was the highest for the group since 1Q12, which had included a one-time gain related to the sale of its Marsiling warehouse.
Margin stability remains
Notwithstanding the lack of new stores for FY13 thus far, we are encouraged by the group’s ability to improve on its operating margins. Gross profit margin stayed at a healthy 23.2% - similar to 2Q13 (+0.3ppt YoY) – and operating profit improved to 7.1% (+0.1ppt YoY; +0.7ppt QoQ). We are hopeful that these improvements indicate that i) competition amongst the Big 3 supermarkets is manageable and that a tacit agreement not to escalate price competition remains, and ii) economies of scale from its Mandai distribution centre have yet to be exhausted and further margin enhancement should still materialize in the coming quarters.
Seasonally weaker 4Q not a concern
4Q is traditionally the weakest quarter for SSG – due to subdued demand and the annual inventory stock count – but we do not expect the drop-off to be significant and we expect a similar showing with 4Q12’s in terms of margins.
Maintain BUY on a quality company
Management’s willingness to consider outright store location purchases is a plus point (especially with their cash-rich balance sheet), and should create additional opportunities for the group. Factoring in new store additions by early FY14, we maintain BUY on SSG with an unchanged fair value estimate of S$0.78.
Publish date: 24/10/13