1H23 Results: Record war chest to support special dividend
- 1H23 revenue and earnings slightly below expectations; forming 49%/48% of our FY23 revenue/earnings estimates
- Positives: (i) record gross margin of 30.6% for 2Q23, (ii) 1H23 same store sales declined at slower pace of 1% y-o-y vs 2.4% decline in 2H22
- Negatives: (i) surprising labour cost spike of S$4.6m in 2Q23, (ii) utility expenses continue to weigh on earnings
- Declared interim dividend of 3.05$cts at 70% payout ratio; Maintain BUY call with TP of S$1.89
More updates to follow after the analyst briefing on morning of 28 Jul-23.
1H23 revenue increased 2.0% y-o-y while earnings fell 3.0% due to higher utility and labour costs, slightly below expectations. Sheng Siong Group (SSG) reported its 1H23 results, with revenue up 2.0% and net profit down 3.0% y-o-y to S$690.5m and S$62.3m, respectively. Sales from same store fell by 1.0% y-o-y which is offset by new store contribution of 3.3% to 1H23’s revenue. Sales from China operations fell by 0.3% y-o-y.
Gross margin expanded 1.8ppt q-o-q and 0.4ppt y-o-y. Gross margin was stronger q-o-q due to seasonality as 1Q tends to be the weakest quarter for the company in terms of margin due to higher discounting. In terms of y-o-y comparison, gross margin grew by 0.4ppt to 30.6%.
Administrative expenses continue to increase disproportionately faster than revenue. Administrative expenses increased by S$11.4m y-o-y (equivalent to +9.8% y-o-y), of which S$6.1m increase was due to higher staff cost and S$5.8m increase came from higher utility expenses.
Declared 3.05$cts interim dividend. Company declared lower 3.05$cts interim dividend versus 3.15$cts in 1H22, in line with company’s practice of maintaining 70% payout ratio.
Company continues to build up its war chest with cash balance at record high of S$289m. Company continues to be cash flow generative, adding S$5.8m to its war chest in 2Q23.
Results tracking slightly below FY23 estimates. Revenue and earnings form c.49%/48% of our FY23 revenue and earnings estimates. We were surprised by the significant labour cost spike of S$4.6m in 2Q23 alone vs S$1.5m in 1Q23, which we believe could be partially due to bonus payout during the quarter. We expect the significant labour cost spike to be a one-off and should revert to S$1-2m range of increase for the subsequent quarters.
Expect stronger top-line growth and margin improvement in subsequent quarters. The company has proven that it can grow its top-line in a shrinking market (based on supermarket & hypermarket value index from Department of Statistics, the industry shrank by 7-8% for Apr-23 and May-23 due to post COVID dining out effect). As the post COVID dining out effect fades, we expect to see higher revenue growth rates in subsequent quarters. In addition, we believe record 2Q23 gross margin is indicative of further room for margin expansion in the subsequent quarters through better sales mix.
Looking out for special dividend as re-rating catalyst. Based on our estimated dividend payout and current share price of S$1.61, FY23F yield is expected to be 3.9%. This rate is relatively unattractive compared to plethora of higher yielding dividend options in the market. Given the significant cash reserve of S$289m, we believe the company can afford to pay a special dividend, which will serve as key attraction for dividend yield seekers. Maintain BUY call with TP of S$1.89, based on 21x FY23F earnings, -1SD of its average pre-COVID-19 PE ratio.