Background: Dubbed the IPO darling of the year, Sheng Siong is Singapore’s third-largest grocery retailer after NTUC FairPrice and Dairy Farm. Its stores are primarily located in the HDB heartlands, targeting the lower-income mass market. By year-end, the company will have 25 outlets with a total floor area of 348,000 sq ft.
Recent Development: Sheng Siong is holding steady above its IPO price of $0.33, as it delivered a set of expected 3Q11 results. Revenue slipped by 9.3% YoY to $146.3m and net profit fell by 50.9% YoY to $6.6m. The drop followed the closure of its outlet in Ten Mile Junction in November last year and another in Tanjong Katong in September this year, as well as the absence of one-off investment gains compared with 3Q10.
Our view
Better margins. Gross profit margins edged up by 1.4ppt YoY to 23.1% through better sales mix of higher-margin goods, increased direct sourcing and more bulk purchasing rebates. The company targets to grow its house brand from 300 to 1,000 products in order to capture better margins.
Store expansion on track. YTD, Sheng Siong has begun operations in Thomson Imperial Court (November), Teck Whye (May) and Elias Mall (January). Management said it has secured the lease for its Woodlands outlet, which should open by next month, providing an extra 14,239 sq ft of retail space. The company looks set to increase its retail network to 40 outlets.
Lower sales for full year but bottomline may hold. The full year is expected to deliver lower sales due to a lag in revenue contribution from the new outlets and the closure of two main outlets. However, the company has announced the sale of its property on 3000 Marsiling Road, of which a net gain of $11.34m will be recognised in 4Q11. This should have a positive impact on its net margins overall. Main risks include increased competition and difficulties in securing new rental spaces.
Valuations. The stock currently trades at 17.4x core FY10 PER, still at a discount to its closest peer, Dairy Farm. Sheng Siong is committed to distributing up to 90% of its FY11-12 net profit, which could provide a dividend yield of up to 5%.
Key ratios…
Price-to-earnings: 13.1x
Price-to-NTA: 4.0x
Net cash/(debt) per share: S$0.09
Net cash as % of market cap: 21.7%
Share price S$0.405
Issued shares (m) 1,383.3
Market cap (S$m) 560.3
Free float (%) 15%
Recent fundraising activities Aug’11 – IPO comprising 201.5m new shares @ $0.33
Financial YE 31 Dec
Major shareholders SS Holdings (35.7%) Lim Hock Eng (12.7%)
YTD change nm
52-wk price range S$0.310-0.580
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