• Better gross profit margin of 25.2%
• Management sees more competition
• Raised FV to 95 cents

2Q15 results in-line

Sheng Siong Group’s (SSG) 2Q15 results were in line with expectations, as revenue grew 4.3% YoY to S$179m, forming 23% of our FY15 forecast. The group’s new stores contributed 4% to this growth, while 0.3% came from old stores. In addition to the range of initiatives such as bulk handling, favourable factors like the depreciation of SGD against MYR has allowed the group to push for lower input prices, resulting in a 0.5ppt QoQ rise in gross margin to 25.2%.

Administrative expenses were a tad higher at 16.8% of sales, mainly due to higher staff costs by S$1.2m. But the 18.6% rise in operating profit was helped by rental income received and government grants. As a result, net profit also increased 23.1% YoY to S$13.6m, comprising 25% of our full-year estimates.

In a more competitive environment for now

Management acknowledged the flat sales performance from its old stores, and are working on the key underperforming stores during the quarter. One initiative is the renovation of old stores in matured housing estates that have seen a declining sales growth, whereby one store is already scheduled for renovation in 2H15.

In addition, the environment has currently turned more competitive, in view of heavier promotions by peers to ride on “SG50” celebrations. Management has cited a tepid demand, and this could persist given the soft market conditions.

Still prefer this stock under our consumer coverage

In light of the above, there could be a cap on growth rates for SSG’s stores. Nonetheless, we believe 2H15 will be partially helped by the additional rental income of ~S$0.5m from leasing of excess space at Block 506 Tampines. The group had also received an extra S$853k in government grants for some of the older projects, and will continue to receive grants on more productivity initiatives such as self-check-out counters.

The group’s balance sheet remained healthy with net cash of S$131.7m, and they have also declared a higher DPS of 1.75c (2Q14: 1.5c). We keep our estimates largely unchanged, while we make some upward revision to our assumption for the group’s gross margins. Our DCF-derived FV estimate is thus raised to S$0.95 (prev: S$0.92). Maintain BUY.

Source: OCBC Research - 27 Jul 2015