Saturday, July 26, 2014

Sheng Siong Group - When the stars align

What Happened 
2Q14 earnings have beaten expectations. The upside in margins was led by cost savings from bulk handling and logistical efficiencies, a trend fairly evident since the opening of its distribution centre in 2011. What made the quarter truly stand out were: 1) lower input costs from manufacturing overcapacity in China which boosted margins for house brands, and 2) a lagged price effect for fresh food input costs, which have not yet risen in line with the selling prices. 

What We Think
Gross margins moving forward will not sustain at this record-high level (24.7%), as factors like temporary lower input prices for house brands are fleeting. But the broader cost savings from bulk handling and higher fresh food mix will ensure that GP margins stay in the 23.5-24.5% range (vs. 22% in 2011, before efficiencies started to kick in). At ~75% utilisation rate, we think that efficiency gains from the new Mandai distribution centre will help maintain the current margin level, which is already much improved compared to the past. Moving forward, higher costs like foreign levies will dent margins a little, but the more important factor is that competition will remain well-behaved, allowing SSG to pass on any cost increases. Higher costs seem to be hitting a competitor particularly hard. In 2014, we believe that NTUC and SSG gained market share from Giant (which has recently closed a store and is slated to close ~5 more). 

What You Should Do
Stay invested in SSG. Even though finding new stores is difficult, prudent cost and labour management can help keep costs under control. Its still-strong free cashflow (FY13: ~S$20m) and net cash position (~S$95m) will see payments for Junction 9 (~S$6m/year) and Tampines (~S$59m in 2014) being met. 

No comments:

Post a Comment