Sheng Siong Group - Chugging along nicely

A solid set of results, with earnings growth led by contributions from new stores and margin expansion. The decline in comparable store sales looks worrying but is largely due to temporary factors. 3Q13 core earnings is in line and forms 27% of our and consensus full-year estimates, while 9M13 forms 74%. We tweak our estimates as a result of housekeeping. There is no change to our target price, which is still based on 23x CY14 P/E (10% discount to Dairy Farm). Catalysts are to come from earnings delivery led by new stores and margin expansion. We maintain our Outperform rating.

3Q highlights  Core earnings 8% growth yoy were driven by contributions from new stores (up S$12.6m) and expanding margins. EBIT margins crossed the 7% mark for the first time since IPO, led by another quarter of high gross margins of 23.2% due to cost savings from Mandai Distribution Centre and tight cost control. However, full-year EBIT margin is likely to be a high 6% because of next quarter’s payout of year-end bonuses and the booking of S$0.9m of inventory writeoffs. We are not worried by the decline in mature store sales of S$4.5m as a large part is due to construction work at Bedok and The Verge stores. These stores contributed S$3.5m of the decline. This temporary inconvenience should be more than compensated by increased footfalls when construction of the multi-storey carpark and MRT are completed, respectively.      No new stores  Although no new stores have been announced so far this year, we think that the earnings contribution from the 11 new stores opened after the IPO has room to grow given that peak sales usually occur in the third year.      Maintain Outperform  Share price has fallen 15% since its Jul high, and is undemanding at 19x CY14 P/E vs. the peer average of 22x. Valuations are further supported by a 4.8% CY14 dividend yield.