Time to go defensive

FY12 closes on a good note
Sheng Siong Group’s (SSG) FY12 results met our expectations with revenue and net profit coming within 2% of our estimates. Top-line grew 10.2% YoY to S$637.3m while prudent cost management ensured an improvement in core operating profit margin by 0.3 ppt to 6.2% (excluding one-off gain of S$10.4m from the sale of its Marsiling warehouse). Management also declared a final dividend of 1.75 S cents (versus 1.77 S cents in FY11), and committed to extend its 90% PAT payout policy for another two years.

Outlook positive for SSG
The Group will enjoy full-year contributions from the eight new stores opened in FY12 so top-line growth should start at a healthy base. In addition, consumer sentiment remains tentative with the lingering economic uncertainty, and this has featured in the recent retail sales data where dining out has declined on a YoY basis. With this trend likely to persist in the coming quarters, we expect spending at supermarket chains like SSG to benefit.

Expansion target remains; cost management to continue
Management retains its 10% retail space growth target, which
we feel is achievable. With ongoing estate rejuvenations plans for older estates such as Hougang, rental opportunities will present themselves. In terms of wage pressures, SSG has managed it admirably well thus far so we expect gradual cost increases to keep pace with revenue growth.

Valuation raised; upgrade to BUY
In light of the possible turn in consumer sentiment, we reverse our previously conservative assumptions and raise our FY13/14F projections to incorporate greater consumer spending, store openings. Our fair value increases to S$0.69 from S$0.58 previously. Upgrade to BUY.

C. Cost management to continue

i. GP margin to hold
Even with the inventory stock count and subsequent write-offs, gross profit margin has stayed stable within the upper ranges of 22%-23%. With management maintaining its margin enhancement initiatives such as increasing direct sourcing, bulk handling, and housebrand offerings – not to mention the maintenance of the tacit agreement amongst the Big 3 supermarket chains not to ignite price competition – we expect this stable trend to persist for the coming quarters.

ii. Opex increases should keep gradual pace with revenue growth
The implementation of the new warehouse system back in Oct 2012 and the economies of scale afforded by its Mandai Link Distribution Centre have helped to keep a lid on operating expenses despite the rising cost environment. Administrative expenses were about 15.8% of revenue for FY11 and FY12, inching only 0.2ppt higher from FY10. While wages look set to increase further in FY13, the variable wage components introduced previously (that are pegged to targets such as store revenue etc) should help the Group manage the increases more efficiently as this would prevent a sudden spike in the percentage of administrative expenses against revenue.

D. Valuations raised; time for defensive allocation
Despite the equity market rally, the economic situation remains uncertain. With consumer spending likely to deteriorate in the coming months – especially in anticipation of job cuts from US/European based firms – we feel that supermarkets like SSG will benefit. Therefore, we reverse our previously conservative assumptions and raise our FY13/14F projections to incorporate greater consumer spending, store openings. Our top line now factors in a 12% YoY increase (10% previously). In addition, we factored in a slower rate of operating expense increases. As a result, these adjustments raise our fair value increases to S$0.69 from S$0.58 previously. Upgrade to BUY.


A. Results highlights
 i. FY12 meets expectations Sheng Siong Group’s (SSG) FY12 results met our expectations with revenue and net profit falling within 2% of our estimates. Top-line grew 10.2% YoY To S$637.3m following the increases in gross retail space during the year while prudent cost management in a rising cost environment ensured an improvement in core operating profit margin by 0.3 ppt to 6.2% (excluding one-off gain of S$10.4m from the sale of its Marsiling warehouse). Core PATMI rose 14.8% YoY to S$31.3m. Management also declared a final dividend of 1.75 S cents (versus 1.77 S cents in FY11), to bring its total dividends for FY12 to 2.75 S cents, which exceeded its 90% PAT payout commitment slightly.

ii. Smaller inventory write-off
4Q is traditionally the weakest for the Group, and added pressure on gross profit margin will come from the annual inventory stock count. In FY11, the Group experienced a write-off of S$1.7m, which translated to a 1.2ppt hit on its gross profit margin. Prior to its FY12 results, we had anticipated a smaller stock count write-off, and we were not disappointed with FY12’s much smaller write-off of S$1.2m. This resulted in a margin improvement of 3.4ppt to 22.7% from the same period a year ago.

iii. 90% dividend payout policy continues for another two years
With its strong cash position, management has decided to extend the 90% PAT payout policy for another two years. Although already factored into our earlier projections, this is a welcomed development nonetheless as it maintains SSG’s allure as a defensive counter with attractive yields.

B. FY13 outlook positive for SSG

i. The trend of eating out is waning According to the latest retail sales figures, the trend of expenditure on eating out had waned towards the end of FY12. With the economic situation in FY13 remaining consistent with the previous year – despite equity market euphoria – we expect the trends exhibited to carry over. As consumers tighten up their purse strings, supermarkets will be the likely beneficiaries as dining-out becomes less frequent.

ii. In our view, expansion target of 10% is achievable
Management retains its 10% retail store growth target but cautions that it remains challenging to find suitable locations. While the environment is challenging – especially with competition from its other Big 3 rivals – we deem the target to be achievable given i) estate rejuvenation by the government, and ii) new area opportunities for the Group. For the former, the government has previously highlighted its plans to rejuvenate older housing estates such as those in Hougang, East Coast. This will help open up opportunities for the Group to explore store openings especially given their lack of representation in such areas like Hougang and Marine Parade. For the latter, a wave of younger residents will be introduced into the area and that will help to boost up the consumer profile (i.e. spending patterns) for SSG.

iii. Healthy balance sheet negates capex
With its strong cash balance of about S$120m and zero debt holdings, SSG will have no issue in expanding beyond the 10% target. As a guide, in FY12, it spent S$12.3m on eight stores (~52K sf) so that worked out to be about $235K per thousand square feet.