• Margins maintained over the year
• 90% payout ratio kept for next two years
• Increasing FV to 81 cents

FY14 results in line with expectations

Sheng Siong Group’s (SSG) FY14 results largely met the street’s expectations. FY14 revenue rose 5.6% to S$726.0m and net profit increased 22.3% to S$47.6m, coming in marginally higher than our forecast. Topline was driven by new stores and old stores sales, which grew by 2.3% and 3.3%, respectively. Looking ahead, the following growth drivers are likely to arise: 1) management expects to see new store openings early this year, 2) ramp up from recently opened stores (a ~4k sq ft store in Penjuru area and a ~9.8k sq ft store in Tampines), and 3) the Bedok store may no longer be a drag on revenue after a better 4Q14 performance. With that said, we are keeping our assumption of 5.2% revenue growth for FY15 as the 8 stores that were opened in 2012 would normalise as these stores enter the third year of operations. Should the plan for new stores materialise this year, rampup from the new stores would likely lead to better revenue contributions from FY16 onwards.

Sustainable margins

Notable improvement in gross profit margin from 23% to 24.2% came on the back of lower costs from its distribution centre, stable selling prices and better sales mix. The latter factor includes continued focus on fresh produce, and we understand that the supermarket industry has also seen a gradual increase in concentration towards frozen products such as frozen seafood, which garners good margins as well. Moreover, while there was higher manpower costs as a result of higher bonuses given to its employees, operating margin had improved, proving effective cost control by the management. Going forward, we expect margins to at least maintain at current levels.

Maintain BUY, raising FV to 81 cents

A cash dividend of 1.5 S-cents/share was declared, with total full-year DPS at 3.0 S-cents, giving a dividend yield of 4.1%. We maintain BUY with a slightly higher DCF-derived fair value estimate of S$0.81 (previous: S$0.77), mainly attributable to better gross profit margin expectations.

Source: OCBC Research - 27 Feb 2015