• FY13 results in-line
• Expect stable margins and slower growth in FY14
• Prudent expansion and execution

FY13 results in-line

Sheng Siong Group’s (SSG) FY13 revenue increased 7.9% to S$687.4m and forms 99.9% of our forecasts. Gross margin improved from 22.1% to 23.0% due to better sales mix and utilisation of distribution centre. Core net profit increased 18.6% to S$38.9m, or about 99.2% of our forecasts. A final dividend of 1.4 S-cents per share is proposed, bringing the total dividend to 2.6 S-cents per share in FY13, or a yield of 4.3% based on Friday’s closing price.

Expect stable margins and slower growth in FY14

We expect revenue growth in 2014 to be slower at 5%, which is to be mainly driven by the maturing 11 new stores opened in FY11 and FY12. SSSG is expected to be relatively flat as benefits of 24h operations have been reaped in FY13. Management guided that the Bedok Central and the Verge stores continue to be affected by the construction activities, which we think have bottomed out and could provide upside surprise if normalcy resumes soon. We expect operating profit margins to be stable around 7%. We think gross margin will improve through higher warehouse utilisation, direct sourcing and better sales mix. But these are likely to be negated by higher labour costs from foreign worker levies and wage inflation as competition for local service staff intensifies amidst foreign labour tightening policies.

Prudent expansion and execution

Management revealed that they had a few options in FY13 to open new stores but did not as the price was not right. They also emphasised that they would want to see success in the pilot e-commerce project first before scaling up to the whole island. Instead of chasing short-term performance numbers to show the market, we think the demonstrated prudence in expansion and execution are essential decision-making processes for long-term growth and preservation of net profit margins. We maintain our BUY call with a new fair value of S$0.68 as we roll forward our DCF model.

Source: OCBC Research - 24 Feb 2014