• E-commerce still in pilot phase
• Expect better margins from direct sourcing and higher warehouse utilisation
• Guidance on future dividend policy to affect stock price

E-commerce in pilot phase

Sheng Siong Group (SSG) has commenced its e-commerce business for limited areas which currently makes negligible contribution to the group. We understand from a recent meeting with management that they are still promoting it to bring more clients on board. They will also wait for the pilot phase to be completed and reasonably successful before expanding to cover whole of Singapore. We view this as a prudent move as it shows how SSG takes calculated risks.

Expect better margins from direct sourcing and higher warehouse utilisation

The Mandai warehouse is currently 75% utilised, where ~S$390m of goods sold in FY12 were handled. Management has guided an increment to ~S$500m of goods per year are to be handled. Through more direct sourcing and utilisation of the warehouse, we expect gross profit margin to improve by 0.5ppt to 1ppt in FY14.

Guidance on future dividend policy to be closely watched

SSG’s 90% payout ratio dividend policy will expire in FY14, and question remains on its continuation. Should the payout ratio be decreased drastically, SSG would lose some attractiveness as a yield play and possibly affecting the share price. In 2013, unfavourable rental markets saw SSG reluctantly attempting to acquire properties. With a net cash of ~S$108m as of 3Q13, SSG has sufficient buffer for three stores of its current average store size of 12k sqft at an assumed S$2,500psf. However, we think possible further property acquisitions will be a major factor in deciding future dividend policy, noting that the current 33 stores (excluding Yishun Junction 9 which is awaiting final authority approvals) is still 17 short of the target 50 stores.

Maintain BUY

Due to a change in analyst and assumptions (largely due to a higher cost of equity), we have a DCF-derived fair value estimate of S$0.70 (previous: S$0.78).

Source: OCBC Research - 10 Feb 2014