Sheng Siong Group

UOBKayhian on 28 Apr 2014

VALUATION

• Sheng Siong Group (Sheng Siong) is currently trading at consensus 2014F and 2015F PE of 21.4x and 19.4x respectively. This is in comparison to Dairy Farm International’s PE of 25.8x and 23.4x. The group’s earnings are projected to grow at a 3-year CAGR of 6.5%.
• 4.3-4.8% dividend yields for 2014-16 based on consensus forecasts. Consensus 12-month target price of S$0.67 implies an upside of 8.1% from the current level.

INVESTMENT HIGHLIGHTS

• 5.7% yoy revenue growth beat consensus and management expectations. 1Q14 revenue of S$189.7m represents 26.4% of consensus full-year forecast. About 2.7ppt of revenue growth was attributable to eight new stores that opened in 2012 while 3ppt was due to higher sales from existing stores. The latter was also helped by the 24-hour operations in 29 outlets. Top-line growth beat management’s 5% guidance. The eight new stores are expected to continue to ramp up sales for the rest of the year. The group will also be renovating three outlets that have been underperforming (growth of 1% or less), temporarily shutting down operations at two while partially closing one.
• Margin improvement despite operating cost pressures due to higher prices and lower cost of goods. Sheng Siong’s gross margin edged higher from an adjusted 23.4% in 4Q13) to 23.6% in 1Q14) while operating margin improved from 6.6% to 7.9%. Management attributed these to: a) higher selling prices, b) lower input costs due to bulk and direct purchasing, c) better operating leverage, and d) lower distribution expenses on improved efficiency. The group has been able to manage labour cost pressures so far as we estimate that 25-35% of its personnel expense is variable. There is also minimal cost added from its 24-hour operations as operating expenses such as utilities are already fixed (ie freezers always operate 24 hours) while only a lean staff count is needed to cover night shifts. Net profit rose 19.3% yoy to S$12.5m, representing 30.7% of consensus full-year forecast.
• Still shopping for new space; industry trend towards premium pricing. Management continues to be actively scouting for good locations to set up new outlets. While availability is not an issue, negotiating the right terms and suitability of the space are more challenging hurdles. Supermarket players are also seen to be shifting towards high-end pricing as cost pressures are expected to remain. As an indication, Dairy Farm’s upscale supermarket brand (Cold Storage) continued to perform well in 2013 while mid-market brands (Giant, 7-Eleven) were affected by escalating costs, sluggish consumer demand and intense competition.