Sheng  Siong  reported  4Q12  net  profit  of  S$8.0m  (+113%  YoY)  which  came in-line  with  ours  and  consensus  expectations.  Full  year  net  profit  grew  by 53% YoY to  S$53m.  Excluding the one-off gain of S$10.5m from the  sale of its old warehouse, earnings grew by 14% YoY against a 10% growth in sales. Gross margins have shown sequential qoq improvement to end the  year at 22.1%, on par with 2011 and our projections. Key highlight of the results was a 90% payout in dividends. We should expect this generous payout to follow 
through till 2014. At last close, this translates into a yield of 4.4%. While the yield  may  seem  pedestrian,  we  like  the  company  for  its  cash  rich  business model.  It  has  a  negative  cash  conversion  cycle,  zero  debt  and  is  sitting  on net  cash  of  S$120m  which  translates  into  8.7  S¢  cash  p/share  or  14%  of market cap. We introduce our  2014 projections  and derive a new higher TP of  S$0.66,  pegged  to  22x  FY14F  earnings.  Maintain  BUY.  The  company  will be holding its results briefing tomorrow morning.

New  store  openings  in  2012  should  propel  2013  earnings.  The  Company opened eight new outlets during FY12, increasing its number of outlets from 25 to 33.  In  terms  of  gross  floor  area  (GFA),  it  increased  by  15%  to  400,000sf  exceeding its earlier guidance of 10% p.a. We should expect earnings from these new stores to flow through to propel earnings growth in 2013.

What  are  our  assumptions  for  2013  &  2014?  We  have  assumed  the  Group manages to maintain gross margins of 22%. In terms of growth in GFA, we have assumed +8% in FY13 and +3% in FY14. This is against management guidance of  +10%  p.a.  Our  lower  projections  in  FY14  takes  into  account  our  cautious stance for potential new locations for outlets. However, we are assuming a higher same-store-sales  growth  of  4%  in  FY14  against  2%  in  FY13.  Our  earnings projections also assume just six months contributions from new stores.

Key Highlights:

Revenue  growth  due  to  new  store  openings,  offset  by  closure  of  Katong  outlet. Revenue  grew  by  double  digits  (10.2%)  propelled  by  new  stores  and  higher  same  store sales of 3% but offset by the closure of the Katong outlet in 3Q11.

Number  of  housebrands  has  increased.  Housebrands  carry  a  higher  margin  than  third party  products.  The  Company  outsources  all  the  manufacturing.  At  last  discussion  we understand  housebrands  account  for  5%  of  overall  sales.  Management  keen  to  raise  this percentage and has increase the number of housebrands from 300 in 4Q11 to 400 in 4Q12.

Gross margins have sequentially improved qoq to be on par with FY11. In 4Q11, the Group's gross margins took a major hit to fall to a low of 20.5%. This was attributed to price wars  between  the  Singapore  supermarkets.  Since  then,  we  have  seen  gross  margins sequentially improved quarter on quarter to end 2012 at 22.1%, unchanged from 2011 and in line with our projections. Going forward, we have assumed this level be maintained.

Other  income  includes  one-off.  Other  income  of  S$14.9m  includes  a  S$10.5m  one-off gain from the sale of its old Marsiling warehouse.

Details on admin expenses. Admin expenses for 2011 included S$1.8m in IPO expenses. As  a  %  of  revenue,  admin  expenses  was  15.8%  vs  15.5%  for  2011  (excluding  IPO expenses).  The  slightly  higher  %  is  due  to  the  eight  new  outlets  opened  in  FY12  which require time for sales to build up.

Source: OSK