Efficiency gains here to stay…
9M14 gross margins improved to 24.2% from 23.0% (9M13), in line with our projections. This was despite food inflation for 9M14 coming in at 2.9% and increasing labour costs. Efficiencies from operating the Mandai distribution hub continue to reap cost savings and margins will continue to improve as more stores are added to the current 33 stores, given the current distribution hub utilisation rate of only about 70-75%.
…and effective cost management
Rising manpower costs and human resource shortages have plagued the industry over the past year. We see competitors such as Giant struggling to keep stores open as manpower becomes more of an issue. In contrast, Sheng Siong has managed this particularly well. Its administrative expenses increased from 16% of sales in 9M13 to 16.2% in 9M14 on higher employee bonuses, while its rental cost has remained stable at 2.6% of revenues.
No growth yet for FY15, but has cash and pays dividends
Flushed with cash (~S$178.7m) and armed with a track record of opportunistic store expansions during market downturns (three new outlets during the Asian financial crisis over 1995-2000; and 14 outlets during the 2000-2005 Dot-Com crash), Sheng Siong looks set to embark on another round of outlet expansions given the slowing regional growth and a falling Singapore property market. Its current share price implies an FY14 dividend yield of ~4.6% (FCF yield ~5%) and valuations at this level are undemanding. Immediate catalysts for the stock include 1) concrete outlet expansion plans, and 2) more visibility for its China expansion.