20140428-Maybank_KERPL-Efficiency_initiatives_shine_through_11页_555kb

Sheng Siong Group (SSG SP) Summary

Core Information

• Share Price: SGD0.62
• Target Price: SGD0.63 (+2%)
• Market Cap (USD): 683M
• Average Daily Trading Volume (USD): 0.2M
• Industry: Consumer Staples
• Recommendation: HOLD (upgraded from SELL)
• Location: Singapore

Key Financial Highlights

• 1Q14 Revenue: SGD627.6m, up 5.7% YoY
• Same Store Sales Growth (SSSG): 3%, with 1% attributed to extended operating hours
• Gross Margin: 23.8% for 1Q14 (up from 22.5% in 1Q13 and 23.2% in 4Q13)
• Net Profit: SGD12.5m, up 19.3% YoY
• Core EPS (cts): 0.9, with a 35.8% QoQ increase
• Net Dividend Yield: 4.5%
• ROAE (%): 19.6 (up from 12.2 in FY12A)
• Dividend Payout Ratio: 90% (projected to stay consistent)

Key Performance Factors

• Efficiency Initiatives: The company has seen significant improvements in gross margin due to ongoing efficiency efforts, including direct buying and bulk handling, which increased from 55% to 60% of total purchases.
• Extended Operating Hours: 29 out of 33 stores were converted to 24-hour operations, contributing to improved SSSG.
• Supplier Rebates: The timing of Chinese New Year led to a one-month lag in receiving rebates, artificially inflating the 1Q14 gross margin. Normalized margin is expected to be 23.6%, still showing improvement.
• Cost Control: Operating costs increased by 6.6% YoY, but the company managed to maintain strong net profit growth.

Revenue and Growth Outlook

• Revenue Growth from New Stores: Expected to remain limited due to the lack of available sites.
• Future Revenue Growth: Projected to be modest, with FY14E revenue at SGD735.9m, FY15E at SGD766.9m, and FY16E at SGD790.7m.
• EPS Growth: FY14E-16E EPS is raised by 9% due to improved margins and better-than-expected performance.

Valuation and Peer Comparison

• Target Price: SGD0.63, based on a 20x FY14E P/E ratio (up from 18x previously)
• P/E Ratios:
  • FY14E: 19.5
  • FY15E: 18.6
  • FY16E: 18.1
• P/BV (Price to Book Value):
  • FY14E: 5.6
  • FY15E: 5.3
  • FY16E: 5.1
• EV/EBITDA:
  • FY14E: 12.9
  • FY15E: 12.1
  • FY16E: 11.6
• Peer Comparison: Sheng Siong is currently trading at a discount compared to regional supermarket peers, which are trading at an average of 30x FY14E P/E.

Key Ratios and Metrics

• Gross Margin: 23.8% (1Q14), trending upward even after normalizing for supplier rebates.
• Operating Margin: 7.9% (1Q14), up from 6.6% (4Q13).
• Net Margin: 6.6% (1Q14), up from 5.5% (1Q13).
• Free Cash Flow Yield: 3.7% (FYE Dec), showing a positive trend.
• Dividend Cover: 1.0x (1Q14), indicating strong dividend sustainability.

Strategic Considerations

• New Store Expansion: Limited due to site availability and rental costs exceeding targets.
• Dividend Sustainability: Maintaining a 90% payout ratio could be challenged if new stores are not added.
• Competitive Landscape: Competitors are not engaging in price wars, and raw material prices are declining, contributing to margin improvements.
• Efficiency Gains: Continued focus on efficiency initiatives is expected to support margin expansion and profitability.

Figures and Trends

• Figure 1: SSSG trend shows a return to positive territory in 4Q13.
• Figure 2: 1Q is typically the strongest season for revenue growth.
• Figure 3: Gross margin trend shows a one-month lag in rebates affecting 1Q14 results.
• Figure 4: Gross margin still trending upward after normalizing for rebates.
• Figure 5: Slow growth in gross letable area indicates limited store expansion.
• Figure 6: 1Q14 results summary highlights strong net profit and margin improvements.

Conclusion

Sheng Siong Group has demonstrated improved performance in 1Q14 with higher than expected same store sales growth and margin improvement. The company's efficiency initiatives and extended operating hours have contributed positively to its results. Despite limited revenue growth from new stores, the upgraded recommendation to HOLD reflects confidence in its ability to maintain strong margins and profitability. The stock is currently undervalued compared to regional peers, and the higher target price of SGD0.63 is justified by its improved earnings profile.