Stellar results. 3Q12 results are in line with ours and consensus’s expectations, accounting for 75% of our core profit estimates. Sheng Siong reported 3Q12 sales of SGD169.7m, up 16% YoY, and net profit of 9.8m, up 48.1% YoY. Our positive outlook for Sheng Siong remains unchanged, with expansion plans on track to open two additional stores by year end. We expect further margin to improve as benefits of the new warehouse have begun to actualize this quarter, and continue onto the next. Reiterate buy on a highly defensive sector coupled with steady growth.

Healthy margin improvement. Sheng Siong’s YoY sales growth was driven by six new outlets which began operations this year. Comparable same store sales grew 4.3% YoY to SGD434. Margin pressures from store openings and heavy competition appear to have subsided with the gap between cost of sales and sales narrowing. Gross margin has climbed by 1ppt QoQ to 22.9%, while operating margin is up 1.4ppt QoQ to 6.3%.

Store growth surpasses expectations. As of 3Q12, Sheng Siong has 31 outlets with 391,000sq ft in retail area, resulting in a 6.2% growth QoQ in retail space. Sheng Siong continues its push into the older housing estates and will be opening two new stores in Ghim Moh and Clementi in 4Q12, adding an additional 8,800 sq ft to its portfolio. As a whole, the group will grow by 14.8% YoY in retail space, which surpasses the management’s target of 10% growth YoY.

Financial health in tiptop shape. Sheng Siong’s balance sheet remains strong with a net cash position of SGD107.2m. Coupled with positive operating cash flow, Sheng Siong should have no financial difficulties to further grow in the coming year.

Maintain BUY on defense. We are keeping our estimates intact and target price unchanged at SGD0.52. Reiterate BUY.

Source: Maybank Kim Eng Research - 25 Oct 2012