Despite having no significant developments since our last update report issued on 10 Dec 2012, Sheng Siong Group’s (SSG) share price has soared by more than 25%. We view this amazing appreciation as a result of the street playing catch-up ahead of SSG’s FY12 results release. While we expect a strong set of FY12 results – and have also adjusted our forward expectations accordingly to reflect our optimism, SSG’s recent price action has been far too exuberant and unsustainable (TTM PE of 33x), in our view. Even after fine-tuning our DCF model, our fair value only increases slightly from S$0.55 to S$0.58. Therefore, we urge caution in trading SSG at this point and recommend investors take some profit around current levels. Downgrade to HOLD.
Amazing start to the year
Despite having no significant developments since our last update report issued on 10 Dec 2012, Sheng Siong Group’s (SSG) share price has soared by more than 25%. We view this amazing appreciation as a result of the street finally factoring in SSG’s successful store expansion phase last year, and playing catch-up by raising its expectations for the company ahead of its FY12 results release.
FY12 results preview – a good year for SSG
SSG closed out FY12 with 33 stores (Gross Floor Area: +50K sf to 400K sf). SSG is on-track to at least match its best net-profit performance back in FY10, which included a S$9.4m gain from investments. Although its 4Q12 will experience a decline due to seasonal weakness and year-end stock count, we do not expect a stock count write-off of last year’s magnitude (a S$1.7m inventory write-off reduced gross profit margins by 1.2ppt).
Forward projections already positive
We had previously upgraded SSG’s FY13/14 revenue growth to 10% on account of full-year contributions from the eight new stores opened in FY12. In addition, we factored in gross profit margin stability – as a result of minimal price competition amongst the Big 3 supermarket operators – and effective management of operating expenses i.e. salaries and wages through the introduction of more variable components.
Downgrade to HOLD on valuation grounds
Even after fine-tuning our DCF model, our fair value estimate only increases slightly to S$0.58 from S$0.55 previously. Therefore, we downgrade SSG to HOLD on valuation grounds. While we continue to favour the company’s management and its growth prospects, its recent price action has been far too exuberant and unsustainable (TTM PE of 33x), in our view. We recommend investors take some profit around current levels, and wait patiently to re-enter at lower levels around S$0.55.
Despite having no significant developments since our last update report issued on 10 Dec 2012, Sheng Siong Group’s (SSG) share price has soared by more than 25%. We view this amazing appreciation as a result of the street finally factoring in SSG’s successful store expansion phase last year, and playing catch-up by raising its expectations for the company ahead of its FY12 results release.
FY12 results preview – a good year for SSG
SSG closed out FY12 with 33 stores (Gross Floor Area: +50K sf to 400K sf). SSG is on-track to at least match its best net-profit performance back in FY10, which included a S$9.4m gain from investments. Although its 4Q12 will experience a decline due to seasonal weakness and year-end stock count, we do not expect a stock count write-off of last year’s magnitude (a S$1.7m inventory write-off reduced gross profit margins by 1.2ppt).
Forward projections already positive
We had previously upgraded SSG’s FY13/14 revenue growth to 10% on account of full-year contributions from the eight new stores opened in FY12. In addition, we factored in gross profit margin stability – as a result of minimal price competition amongst the Big 3 supermarket operators – and effective management of operating expenses i.e. salaries and wages through the introduction of more variable components.
Downgrade to HOLD on valuation grounds
Even after fine-tuning our DCF model, our fair value estimate only increases slightly to S$0.58 from S$0.55 previously. Therefore, we downgrade SSG to HOLD on valuation grounds. While we continue to favour the company’s management and its growth prospects, its recent price action has been far too exuberant and unsustainable (TTM PE of 33x), in our view. We recommend investors take some profit around current levels, and wait patiently to re-enter at lower levels around S$0.55.
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