FY14 should continue to see earnings growth that is led by contributions from new stores and margin expansion. Sheng Siong's mature stores are facing sales declines at the moment, but this is mainly due to temporary factors.
Under our new rating structure, our call changes from Outperform to Add. Our earnings estimates are intact, while our target price rises as we roll it over to CY15, still based on 23x P/E (10% discount to Dairy Farm). Catalysts include better earnings delivery led by new stores and margin expansion.
Although there are no new stores announced for FY14 so far, earnings from the eight stores opened in FY12 (representing 13% of total retail area) should continue to drive growth. New stores typically see sales start to mature only after 2-3 years. The decline in mature-store sales looks worrying, but a large part of it is due to construction works at the group's Bedok and The Verge stores. In 3Q13, these affected stores contributed S$3.5m of the S$4.5m total decline. This temporary inconvenience should be more than compensated by increased footfalls when the construction of the multi-storey carpark and MRT station is completed. The rest of the decline is due to dwindling traffic at older stores and Sheng Siong plans to refurbish these stores selectively over the course of the year to arrest the decline.
The S$54.9m acquisition of six shop lots totalling 18,500sf in Junction 9 (a mixed development in Yishun set to be completed in Jun 2017) signaled management‟s willingness to utilize the cash on hand to secure good locations. We could see further acquisitions next year. Purchasing stores may be capital intensive, but we note that ROEs are not hurt yet because of the group's estimated S$100m cash balance as at end FY13. This should support the acquisition of two more shop lots.
Maintain positive stance
Sheng Siong's share price has fallen 15% since its Jul high, and it is currently undemanding at 18x CY15 P/E vs. the peer average of 22x. Valuations are further supported by a CY14 dividend yield of 4.8%.
Publish date: 29/11/13