Races through targets. Sheng Siong reported FY12 revenue growth of 10.2% YoY to SGD637.3m, and net profit was up 52.9% YoY to SGD41.7m, in-line with ours and consensus’s expectations. Excluding a one-off gain on sale of warehouse and provision on disposal of available for sale investment, core profit stood at SGD32.9m, up 20.6% YoY. We are positive on the Group’s margin enhancement efforts, outdoing market’s expectations on retail space growth, as well as a commitment to 2 more years of 90% dividend payout. We raise our target price to SGD0.70, pegged to 25x FY13F P/E. Maintain BUY.

Margin enhancement initiatives coming along smoothly. During IPO, the management pointed out three margin enhancement initiatives they would be focusing on (1) increase in direct sourcing and bulk handling, (2) improvement in sales mix of higher margin products, and (3) widened selection of house brands offered. All goals are on track to reach their targets. For example, Sheng Siong has introduced an additional 100 house brands, increasing it to 400 items in store. Despite aggressive store openings which incurred start-up costs, the Group managed to maintain its gross and core operating margins at 22.1% and 6.2% respectively.

Outdone themselves. Sheng Siong has outdone itself by beating original goal of 10% per annum increase in retail space achieve to a 21.5% rise, with 8 store openings in FY12, and same store sales growing by 3% YoY. We have ascribed a more conservative growth of 8.7% for FY13, given the fact that they have outdone the market’s expectations last year.

Ringing with dividends! Apart from declaring an overall dividend of 2.75cts a share, Sheng Siong will be committing to 2 more years of 90% dividend payout. This is highly positive, given they are already one of the highest yielding supermarket play in the region. We expect dividend yield of 4.0% in FY13F, compared to peers of 3.1%.

A safe supermarket. We raise our valuations further to 25x FY13F P/E. Catalyst includes possible venture into Johor Bahru, and the successful launch of E-Commerce in 1H13.

Source: Maybank Kim Eng Research - 25 Feb 2013