Sheng Siong

Kim Eng on 30 Jul 2012

On track with earnings estimates. Sheng Siong’s 2Q12 results were in line with expectations; revenue was up 5.2% YoY to SGD146.9m on the basis of higher same store sales and starting contributions from new outlets. Net profit was down 2% YoY to SGD7m, attributed to increases in variable expenses at the new stores. 1H12 results have made up 56% of our earnings estimates. Maintain BUY.

Margin enhancement in the works. Sheng Siong’s gross margin has recovered sequentially, from 20.8% to 21.9%, as the price war with competitors draws to a close, coupled with cost-saving incentives from the launch of its distribution centre. There is room for further margin improvement as a result of direct procurement and bulk buying. Going forward, new, smaller stores (<5,000 sq ft) will achieve better operating efficiency, in our view, thereby also contributing to enhanced margins.

Accelerating expansion plan. Sheng Siong’s active participation in bidding for new shop spaces has officially paid off. By 3Q12, the group will hold a total retail area of 386,000 sq ft, up 10.9% since FY11. In July, the group debuted its first 24-hour store in Geylang. Reception, according to management, was overwhelming. The group is now in negotiations for four more outlets. If successful, this will add a further 25,000 sq ft to the 38,000 sq ft already added so far this year.

Interim dividend of 1 cent declared. The group declared an interim dividend of 1 cent. We continue to be positive on the group’s performance, and its attractive dividend yield of 6.0%. Its e-commerce strategy is scheduled to commence in 1Q13 and expansion into Malaysia is under consideration. Our target price remains unchanged at SGD0.52, implying 18.8x FY13F PER (a 25% discount to Dairy Farm International). Maintain BUY.