1H14 results above expectations
Sheng Siong Group’s (SSG) 1H14 results came in slightly above expectations. 1H14 revenue came in at S$361.3m, forming 50.1% of our FY14 forecast, despite 1H typically being the weaker half-year; 1H14 net profit was S$23.6m, making up 53.9% of our FY14 forecast. In this quarter itself, 2Q14 revenue increased by 7.4% YoY to S$171.6m. We note that this was achieved despite closure of the Chin Swee store for a month for a total makeover and lack of new store opening. Management guided that 6% was due to volume increase as consumers switch from competitors; the remaining 1.4% was attributed to passing on of food inflation to consumers through higher average selling price. Compared to revenue, 2Q14 net profit increased proportionally higher by 30.3% to S$11.1m due to better GP margin (+0.9ppt QoQ to 24.7%). An interim cash dividend of 1.5 S-cents was declared.
Higher warehouse utilisation to drive GP margin According to management, the better GP margin in 2Q14 was driven by:
1) larger proportion of bulk handling,
2) higher fresh produce sales, and
3) lower input costs for house brands as manufacturing slack surfaced in China.
We think the latter two are situational and thus not sustainable drivers. Going forward, we expect the new-high GP margin to taper off. Nevertheless, sustained GP margin improvement would come from higher utilisation of Mandai warehouse (~75% utilised now). Currently, ~60% of goods are purchased through bulk handling, and management is looking to increase it eventually to ~80%.
Maintain BUY with new S$0.76 FV
With upside surprise in the quarter, we raise our assumptions to 6.5% revenue growth in FY14 (previous: 5%) and 24.0% GP margin (previous: 23.5%). We maintain BUY and derive a new S$0.78 fair value estimate (previous: S$0.68). A near-term catalyst would be HDB’s approval for SSG acquisition of Block 506 Tampines Central 1, which has a gfa of approximately 10% of existing total gfa and 9.8k sq ft of it would be able to contribute to earnings as early as 2015.
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