Sheng Siong Group

UOBKayhian on 30 Jul 2013

Valuation

• Sheng Siong Group (SSG) is trading at a forward PE of 24.1x, 21% discount below its peers’ average. Based on Bloomberg’s estimate (9 brokers), SSG has a 12-month target price of S$0.78 with a 2013F dividend yield of 3.6%. Management remains committed to distribute up to 90% of their net profit for 2013 and 2014 as dividends. Investment highlights 

 

• SSG reported a 20.8% yoy increase in net profit to S$8.5m driven by higher revenue and better gross profit margin. Revenue increased 8.7% yoy to S$159.8m due to contribution from new stores, but this was negated by a contraction in comparable same-store sales (SSS) of old stores as keen competition eroded sales. Revenue from the group’s Bedok Central store declined as a nearby carpark was closed while the one at The Verge were also impacted by ongoing construction works in the vicinity. Gross profit margin for 2Q13 

 

• improved 0.7% to 23.2% from improved sales mix and cost efficiencies derived from the Mandai Distribution Centre.

• Management re-iterated that competition is likely to remain keen after competitor Dairy Farm rebranded its “Shop and Save” stores to Giant and Giant Express, reducing prices for some key products in order to
  gain market share. 

 

• Going forward, SSG remains focused on developing in-house brands where margins are better. In-house brands currently only contribute 5% in revenue and management sees room for expansion. On the operating margins, SSG is targeting to maintain them at the higher end of 6% although they face cost pressures from higher wages and foreign workers’ levy in the near term. 

 

• SSG will also transform some of the stores into 24-hour operation and another five will open round-the-clock on Saturdays and eve of public holidays. As they have to keep most of the power-guzzling refrigerators on throughout the night, with just a marginal higher staff costs, they would be able to cater to more customers at night. 

• To expand retail space, they are currently in negotiations on approximately 32,000 sqf of space, one in the east and the other in an estate where SSG does not have a presence. As at 30 Jun 13, SSG has a total retail area of 400,000 sf, a growth of 8.7% yoy.