Monday, July 27, 2015

Sheng Siong Group - Upside from gross margins

Tepid same store sales growth 
2Q15 sales expanded 4.3% yoy to S$179m, driven by five new stores (+4%) and same-store sales (+0.3%). Looking ahead, there is cause to be more positive on the growth from the new stores, given that three of the five new stores were only open for about half of 2Q. However, lacklustre local economic conditions coupled with tepid demand post Chinese New Year caused a drag on same store sales growth (SSSG). 2Q15’s flat SSSG (vs. +2.9% in 1Q15) also reflects intensified competition from retailers offering special “SG50” discounts. For example, NTUC FairPrice announced an initiative providing a 10% discount on its range of housebrand products. 

Gross margins continue to trend up
2Q15 gross margin improved to 25.2% (1Q15: 24.4%), driven by lower input costs from its direct purchasing initiatives and efficiency gains derived from its central distribution centre. In addition, we suspect 1) an improvement in sales mix in favour of higher-margin fresh produce (36% GPM vs. 18% for groceries), and 2) a weaker ringgit (40-50% of its grocery is sourced from Malaysian suppliers) also helped. With operating expenses remaining stable (2Q15’s opex as a % of sales was 17.6%, compared with 17.0-17.4% over the past four quarters), improvement in gross margins flowed straight to the group’s bottomline, boosting 2Q15 net margin to 7.6% (1Q15: 7.1%). 

Interim dividend of 1.75 Scts declared (95% payout)
We continue to like the stock’s high payout ratio (consistently >90%), which we think is sustainable given its strong operating cashflows and low capex requirements. The biggest remaining capex is for its Yishun Junction 9 store (S$34m outstanding to be spread across FY15-17). 

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