Results within expectation, but a tougher road ahead. We are much less optimistic than consensus on future growth prospects. Key data points and management’s signal of a change in strategy, reinforces our view that a tough road lie ahead for the company’s growth prospects. We also believe the company is at a cross road between maintaining growth and the ability to continue paying a substantial dividend.

Same-Store sales continue to decline due to competition. For 3Q13, revenue was up 5% yoy to SGD178m, but this was driven by new stores. SSSG was down around 3%, the third consecutive quarter of decline. This is a worrying trend, only partially addressed by renovation works around two outlets (Bedok Central and The Verge). Management acknowledged the intensification of competition, both via more aggressive promotional activities, especially into fresh food as well as a change in strategy by Dairy Farm (Giant) to open smaller outlets.

Fumbling into an asset-heavier strategy. The most interesting development was management explicitly stating a shift in its asset-light business model. In downgrading the stock to a SELL, we believed the company is too reliant on lower rental locations, an approach which is increasingly restrictive as such stores are now harder to come by. Management is currently looking to buy two outlets, and if this strategy continues, may affect the Group’s ability to continue its high-dividend policy (currently 90%).

Further pressure on labor cost is likely. Gross margin showed a marginal yoy improvement to 23.2% and was stable sequentially. However, operating expenses as a % of revenue increased around 20 basis point yoy to 16.7%. We understand Sheng Siong’s current foreign worker proportion is only slightly below the newly stipulated 40%, and going forward the company will likely have to bear higher costs from the indirect effect of a recent 9% increase in foreign worker’s levy.

Consensus too optimistic; SELL call maintained. E-commerce initiative should be piloting by the end of 2013, but we are not positive on immediate impact. Our estimates are largely unchanged, though we factor in higher capex. FY14-FY15F is still 10% below consensus. Our TP of SGD0.54 is pegged at 18.5x FY14F PER, a 30% discount to regional peers on lower growth potential and overall smaller size.  

Source: Maybank Kim Eng Research - 25 Oct 2013