Sheng Siong Group

UOBKayhian on 23 Oct 2012

Investment Highlights

·      Exceeds store growth target. Sheng Siong Group (Sheng Siong) has opened six new stores ytd, increasing its total retail area by 43,000sf to 391,000sf. This represents a 12.4% increase in retail area, exceeding management’s target of growing store space by 10% in 2012. In our view, there may be more stores rolled out in 4Q12 and early-13.

·      Recovery in gross margin. Sheng Siong’s gross margin has recovered from 20.8% in 1Q12 to 21.9% in 2Q12, due to easing competitive pressure. Going forward, the group will continue to embark on margin expansion initiatives such as: a) increasing the mix of fresh produce, which yields higher margin, b) directly procuring 80% of fresh produce from suppliers, up from 50% currently, and c) increasing the range of house-brands, which have average margin of 27-28%. The group aims to improve gross profit margin by 2ppt in three years’ time.

·      E-commerce initiatives. Sheng Siong plans to roll out the pilot phase of its e-commerce initiative by 1Q13. The group will begin delivery within 2.5km of the Thomson outlet, and will budget approximately S$500,000 for new trucks and IT infrastructure.

·      90% payout ratio. Provided that Sheng Siong does not make any significant acquisitions, the group will maintain a dividend payout ratio of 90%. Consensus forecasts of a FY13 dividend of 2.3 S cents implies dividend yield of 4.9%.

·      Capex plans. Capex requirements will be minimal after the completion of Sheng Siong’s new warehouse facility. Annual maintenance capex is expected to be approximately S$2m-3m.



Valuation

·      Valuations higher than peers. Sheng Siong is currently trading at 18.1x FY13F PE, higher than peers’ average FY13F PE of 9.7x.