Margins continue to defy expectations
- FY23 results track our estimates, but revenue under due to weaker 4Q23, given high 4Q22 base on early CNY stockpile
- 4Q23 same-store sales reverted to a 0.9% decline while gross margin expanded by 1.1% point y-o-y
- Raised FY24F/25F earnings by +0.9%/+4.3% on higher store count and gross margins
- Maintain TP on 17x forward PE ratio peg on marginally higher earnings given higher-for-longer base case
Slightly lower-than-expected top line in 4Q23. Sheng Siong Group (SSG) reported FY23 revenue of S$1.37bn, slightly lower than the expectation of S$1.39bn, with 4Q23 revenue at S$331m. Management mentioned that comparable store sales declined by 0.9% in 4Q23 due to a high base effect in 4Q22. It noted that consumers had stocked up in the last week of Dec 22, ahead of the earlier Chinese New Year (CNY) (22 Jan 23 versus 10 Feb 24). In addition, the continued strong recovery of outbound travel could have also dampened demand.
Bottom line as expected, strong gross margin expansion to continue. SSG reported FY23 net income of S$133.7m, which is in line with expectations despite the revenue shortfall. This was largely achieved by higher-than-expected gross margin expansion. The company recorded its fourth consecutive year with a margin expansion that is above 0.5% points, with a 0.6% points expansion in FY23. The company attributed the continued margin expansion to a marginally better product mix in terms of the higher margin fresh category and house brands.
Competition continues to be fierce ahead of CNY. Retailers have been very aggressive in trying to capture as much of the Community Development Council (CDC) voucher (distributed by the government to alleviate living costs pressure and can be used at heartland stores and supermarkets) value as possible by offering attractive return vouchers when consumers pay using CDC vouchers pre-CNY. However, management highlighted that the CDC vouchers have likely had a limited effect on overall consumption or the choice of retailer. It added that the likely material effect is a shift in payment mode from cash to vouchers. Management is optimistic about achieving higher revenue y-o-y for the CNY period but has limited clarity on the margin.
Secured two new locations in Bukit Batok and Clementi. The company informed us that it has successfully secured two new sites from the Oct-23 tender in Jan-24. The Bukit Batok site belongs to a competitor and is located close to one of SSG’s existing stores. Management stated that it plans to operate these two stores as one existing store, with a combined store space of about 7,000sqft. The company has bided for all four leases in the tender which closed on 8 Feb-24, and plans to bid on all six remaining leases available for the year.