• 1Q14 results in-line
• Better GP margin as results’ key driver
• Downside in share price limited

1Q14 results within expectations

Sheng Siong Group’s (SSG) 1Q14 revenue increased by 5.7% YoY to S$190m, forming 26.3% of our FY14 forecast. This is within expectations as 1Q results are typically stronger due to Chinese New Year. 2.7% of the revenue increase was contributed by eight new stores which opened in 2012, with the remaining 3.0% from comparable same store sales growth; the latter due to longer operating hours for most stores and marketing initiatives. As a result of better gross profit (GP) margin, 1Q14 operating profit increased proportionally higher by 20.7% to S$12.5m (vs. 5.7% YoY increase in revenue), forming 29.0% of our FY14 forecast.

Margins as key driver this quarter

GP margin improved by from 22.5% in 1Q13 to 23.8% in 1Q14. Despite the seemingly small percentage increase, we identify this as the key driver for the significant YoY increase in operating profit as COGS made up 82.1% of operating costs in the quarter. The better GP margin is due to lower input costs derived from the distribution centre, higher selling prices and rebates received from suppliers in direct sourcing. On the other hand, administrative expenses were lower than expected, making up 15.8% of revenue in 1Q14 compared with an average of 16.2% for FY13. We had expected it to creep upwards as a percentage of revenue on the back of a tight labour market, but this is more than compensated for by tight cost control this quarter.

Share price’s downside limited; maintain BUY

We see limited downside at the last closing price of S$0.60 for the following reasons: 1) FY14F dividend yield at 4.8% is expected to lend strong support, 2) bottom line will continue to be boosted by margin improvements through better sales mix, higher warehouse utilisation and direct sourcing, and 3) the group has a healthy balance sheet with net cash of S$109m, making up 13% of market capitalisation. Maintain BUY with fair value estimate of S$0.68.

Source: OCBC Research - 25 Apr 2014