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Profits Jump 20.8% At Sheng Siong

ShengSiongLogoFor the second quarter of 2013, supermarket operator Sheng Siong (SGX: OV8) saw an 8.7% year-on-year increase in revenue to S$159.8m. Earnings grew 20.8% to S$8.5m.

The top-line grew mainly as a result of contribution from newly opened stores – the company’s store count had grown to 33 from 30 a year ago – which helped to offset a year-on-year decline in same-store sales of 1.8%, or $7.3m.

The retailer cited increased competition, unattractive old stores, and stores affected by neighbouring construction works, as reasons for the decline.

Sheng Siong’s growth in earnings was due to expenses rising at a slower pace compared to the increase in revenue. A better control over distribution costs due to improved operational practices had trickled down to the bottom-line.

Expenses did increase, though, but as mentioned earlier, the increase lagged revenue growth. Primary reasons for the increase in operating costs were because of a larger headcount – stemming from the opening of more stores – and rising rental costs.

Sheng Siong’s balance sheet looks healthy – the company is debt-free and has a cash hoard of S$117.6m.

Sheng Siong warned of strong competition in the supermarket industry. It also expressed concern that food inflation might drive up costs. Additionally, the grocer said it was not confident that it could pass on the rising costs to customers.

In addition, more pressure on costs would come from the tightening of the supply of foreign workers. Companies are liable for a levy when hiring foreign workers and Sheng Siong is expecting an increase in labour costs.

Finally, the company stated that they will be remodelling older stores in a bid to improve like-for-like sales. That should be for the long-term benefit for the company, but investors should brace themselves for some short-term pain.

Sheng Siong’s primary strategy for growth is to open supermarkets in areas where they have yet to establish a presence. But on that front, the company is finding it tougher to secure new retail spaces.

There will be a new E-commerce initiative that will be launched in the second half of this year, which will hopefully circumvent the problem of a lack of good retail space.

Sheng Siong has declared an interim dividend of 1.2 cents per share for the quarter, a 20% increase over last year’s 1 cent pay-out.

The company’s shares were $0.695 apiece at Tuesday’s close, carrying a trailing Price-to-Earnings ratio of 26.1 and a dividend yield of 4% based on last year’s annual payout.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.