Sheng Siong

Sheng Siong: good set of 2Q13 results that were in line with expectations, though mgt strikes cautious tone on outlook. Net profit expanded 21% yoy to $8.5m, driven by higher revenue and improved gross margins. Revenue increased 9% yoy to $160m, boosted by new store sales of $20m, which helped offset a contraction in same store sales of $7.3m. Gross margin widened 1.3ppt qoq and 0.7ppt yoy to 23.2%, due to stable selling prices, improved sales mix and cost efficiencies derived from the Mandai Distribution Centre. Over the past one year, Sheng Siong expanded the number of stores from 27 to 35, and its retail area from 368k sf to 400k sf. The group declared an interim cash dividend of 1.2cts. Taking into account the 1.75cts final div for FY12, this translates to a trailing yield of 4.2%. Sheng Siong remains committed to distribute up to 90% of net profit for FY13-14. This is backed by its strong cash flow generation, and net cash of $118m (8.5 cts/sh). Mgt however has a cautious outlook. Notes competition in the supermarket industry is likely to remain keen, in light of tepid economic conditions, and as one of its competitors (Giant) has re-branded its chain of supermarkets. Competition for retail space has not abated and securing new retail outlets could be challenging going forward. The group expects to see upward pressure on manpower costs, in lieu of the foreign worker levies. Furthermore there are market pressures relating to wage adjustment for low wage staff. Food inflation may also increase input costs. As customers become more cost conscious in anticipation of higher interest rates and inflationary expectations, this may affect the group’s ability pass on input cost increases in full to customers. The group may earmark some old stores for major re-fitting, in view of declining same store sales. This could result in a month or so of lost sales for each affected store. The group trades at 25.4x annualized 1H13 P/E. This compares with closest peer Dairy Farm at 35.8x P/E. Other department store operators Parkson Retail Asia trade at 22.9x, and Courts at 12.2x. DMG upgrades to Buy from neutral, lifts TP to $0.78. Maybank KE however downgrades to Hold, with unchg TP of $0.74, citing toppish valuations.