Sheng Siong Group

OCBC Investment Research, Feb 24

FY2013 results were in-line. Sheng Siong Group's (SSG) FY2013 revenue increased 7.9 per cent to S$687.4 million and forms 99.9 per cent of our forecasts. Gross margin improved from 22.1 per cent to 23 per cent due to better sales mix and utilisation of distribution centre.

Core net profit increased 18.6 per cent to S$38.9 million, or about 99.2 per cent of our forecasts. A final dividend of 1.4 Singapore cents per share is proposed, bringing the total dividend to 2.6 S-cents per share in FY2013, or a yield of 4.3 per cent based on Friday's closing price.

Expect stable margins and slower growth in FY2014. We expect revenue growth in 2014 to be slower at 5 per cent, which is to be mainly driven by the maturing 11 new stores opened in FY2011 and FY2012.

SSG is expected to be relatively flat as benefits of 24-hour operations have been reaped in FY2013. Management guided that the Bedok Central and the Verge stores continue to be affected by the construction activities, which we think have bottomed out and could provide upside surprise if normalcy resumes soon.

We expect operating profit margins to be stable around 7 per cent. We think gross margin will improve through higher warehouse utilisation, direct sourcing and better sales mix. But these are likely to be negated by higher labour costs from foreign worker levies and wage inflation as competition for local service staff intensifies amidst foreign labour tightening policies.

Management revealed that they had a few options in FY2013 to open new stores but did not as the price was not right.

They also emphasised that they would want to see success in the pilot e-commerce project first before scaling up to the whole island. Instead of chasing short-term performance numbers to show the market, we think the demonstrated prudence in expansion and execution is essential decision-making processes for long-term growth and preservation of net profit margins.

We maintain our "buy" call with a new fair value of S$0.68 as we roll forward our discounted cash flow model.

BUY