Sheng Siong Group: Key beneficiary of SG60 voucher bonanza
Dual tailwinds of new store openings and SG60 vouchers
Results Highlight
4Q24 results were mixed, with revenue of SGD351mn (+6% y/y) in line with estimates, while earnings fell short at SGD29mn (-15% y/y), on higher operational costs. Revenue growth (+6% y/y) outpaced the industry (~2% in 4Q24). Gross profit margin improved slightly to 30.4%, but earnings declined y/y due to higher staff costs and depreciation. Staff costs rose due to increased variable bonuses, enhanced benefits, and additional headcount from new stores. Depreciation included a one-off SGD3.5mn charge from right-of-use assets related to supermarket reinstatement costs.
Revenue growth largely driven by new store openings. Full-year revenue grew 4.5% y/y, with new stores contributing 2.6% growth and comparable same-store sales rising 1.8%.
Proposed a final dividend of 3.2Scts, representing a 70% payout ratio. The dividend is 2% y/y higher, in line with earnings growth.
Balance sheet remains strong, with no debt and cash of SGD353mn. Despite a SGD50mn outflow for acquiring DFI’s Singapore properties, cash reserves continue to grow, supported by strong cash flow generation.
Briefing Takeaways
High depreciation expense in 4Q24 is one-off. Management clarified that the SGD3.5mn depreciation was a one-time charge for leasehold store reinstatement costs, per accounting standards. Future reinstatement costs will be included in depreciation at est. ~SGD50k per store. Excluding this, 4Q24 earnings would have been SGD32mn (-5% y/y).
Elevated staff costs likely to persist into 2025. Management noted that labour costs will remain high due to: (i) the progressive wage model shifting costs to a more fixed structure, (ii) hiring challenges due to foreign labour quota restrictions and difficulty hiring Singaporeans for in-store roles, and (iii) increased headcount needs with new store openings.
No targeted promotions for SG60 vouchers. Unlike competitors, Sheng Siong is not introducing promotions for voucher use, citing high investment costs for such a system. Instead, it prioritises direct product discounts, as consumers tend to remember product prices over final effective prices.
SG60 voucher impact uncertain but likely more evenly spread. Based on past CDC voucher usage, spending spikes occurred at issuance and expiry. With a larger SG60 distribution, management expects more balanced spending and potential demand for premium groceries.
Cash reserves prioritised for strategic growth. Instead of raising dividend payout ratio, management highlighted that the company is focused on utilising its reserves for strategic investments like acquiring DFI’s assets when opportunities arise.
Our views
Revenue growth to get a SG60 boost. We believe the SGD1.1bn SG60 voucher distribution (~25% of the estimated FY24 modern grocery market) could accelerate a shift from dining out to increased home dining. While Sheng Siong is not actively attracting voucher usage, its competitive pricing should naturally drive consumer spending at its stores. Coupled with six new stores opening in 2024 and another six in 2025, we revised our FY25F revenue from SGD1,518mn to SGD1,541mn. We anticipate stronger performance in 2H25 and 1H26 due to SG60 voucher distribution timing.
Operational costs as a % of revenue to improve slightly y/y, but remain above our initial expectation. Factoring in management’s commentary, we assume a more modest decline in operational costs as % of revenue, mainly from the absence of one-off depreciation and improved operational leverage. We adjusted our FY25F distribution and admin expenses as % of revenue forecast from 19.2% to 20.3% of revenue, slightly lower than FY24F’s 20.7%.
Trim FY25F earnings by 2% on higher operational costs, slightly offset by higher gross profit, other income and net interest income. As noted earlier, we expect operational costs to remain above initial projections. However, we believe these costs could be partially mitigated by promising top-line growth, driven by SGD1.1bn in SG60 vouchers set to boost industry sales in 2025–2026. Margin expansion is also likely, supported by economies of scale from six new store openings in 2024 and another six in 2025. Additionally, we project higher net income as interest rates decline more slowly than initially anticipated.
Maintain BUY with higher TP of SGD1.90. We apply a higher 19x forward PE multiple despite slightly lower FY25F earnings, as we believe this is a more realistic target. Dual tailwinds of record store openings (twelve across 2024–2025) and strong SG60 voucher-driven demand reinforce our positive outlook.
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