- Upgrade to HOLD on better-than-expected 1Q14 results due to higher same store sales growth and margin improvement. TP raised to SGD0.63, pegged to 20x FY14E P/E.
- Even after normalising the effect of rebates received from suppliers, gross margin appears to be on the uptrend. This is a testament to the company’s continual drive for efficiency.
- Revenue growth from new stores likely to remain limited, but margins are likely to stay strong.
1Q14 revenue of SGD627.6m, up 5.7% YoY, with 2.7% attributed to new stores opened in 2012 and 3% same store sales growth. SSSG was bolstered in part by switching most of its outlets (29 out of 33) to round-the-clock operations. SSSG would have been even higher at 3.9% if two stores affected by construction work were excluded.
Gross margin improved to 23.8% for the quarter (1Q13: 22.5%, 4Q13: 23.2%), helped by the flow-over of rebates from suppliers as Chinese New Year occurred earlier this year. Normalising this effect would result in an estimated gross margin of 23.6%, which is still a decent improvement in view of the company’s continued push to procure more efficiently and raw material price subsidies. Together with good operating cost control (+6.6% YoY), 1Q14 net profit was up 19.3% YoY to SGD12.5m.
Upgrade to HOLD
We raise our FY14E-16E EPS by 9% on account of the better-than-expected margin. While we believe revenue growth from new stores will remain limited due to the lack of sites, we are impressed by management’s success with its ongoing efficiency initiatives. Upgrade to HOLD from SELL with a higher TP of SGD0.63 (previously SGD0.53), based on a higher 20x FY14E P/E (previously 18x) given a stronger EPS growth profile.
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