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Why Has Sheng Siong’s Profit Surged 30%?

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Sheng Siong Group (SGX: OV8), one of the largest supermarket chains in Singapore, saw its revenue rise 7.4% in the second quarter of 2014 as compared to the previous year while net profit grew 30.3%.

The retailer operates 33 of its namesake supermarkets across Singapore, with the stores mainly located in the heartlands. Catering to shoppers looking for both “wet” and “dry” shopping options (the former includes live, fresh, and chilled produce, such as seafood, meat and vegetables), Sheng Siong’s supermarkets carries them all. The company’s competitors include Dairy Farm International (SGX: D01), which runs the Giant hypermarkets and the slightly more upscale supermarkets, Cold Storage and Jasons MarketPlace.

Coming back to Sheng Siong’s quarterly earnings, revenue for the quarter was at S$171.6 million as compared to S$159.8 million a year ago. Out of the 7.4% increase in revenue, 2.7% was contributed by eight new stores which were opened in 2012, and 4.7% came from higher comparable same store sales. Even though Sheng Siong’s Chin Swee store was closed for almost a month during the quarter for a total makeover, the company had still managed to achieve commendable revenue growth.

Comparable same store sales growth would have been 5% if the decline in sales from the company’s Bedok Central and The Verge stores (both are affected by ongoing construction works in their vicinity) were omitted. In any case, Sheng Siong attributed refurbishment work done to some stores, longer operating hours as well as marketing initiatives” as primary reasons for the better comparable same store sales.

Sheng Siong’s gross margin for the quarter increased from 23.2% a year ago to 24.7%; the company’s Mandai Distribution Centre had helped to drive cost efficiency.

A higher turnover and improved gross margin had ultimately led to Sheng Siong’s 30.3% growth in net profit to S$11.1 million.

For the six months ended 30 June 2014, revenue grew 6.5% to S$361.3 million while net profit increased by 24.2% to S$23.6 million. The company’s net profit margin was maintained at 6.5% for both the second quarter and first half of 2014.

It is noteworthy that Sheng Siong had no borrowings as of 30 June 2014 and had a cash hoard of S$95.6 million. The firm will be dishing out a dividend of S$0.015 per share for the quarter. This is higher than the S$0.012 per share dividend declared in the corresponding period a year ago.

Going forward, Sheng Siong would be opening new supermarkets in Junction 9 at Yishun and at Block 506 in Tampines Central. The company also warned that it would suffer a dip in gross margin if it cannot pass on any price increases in full to its customers. That’s something to keep an eye on with food inflation coming up to 2.8% in the first five months of 2014 compared to the  same period in the previous year. Jumps in food prices were more distinct in the seafood, vegetables, and fruits categories.

Shares of Sheng Siong closed at S$0.66 on Wednesday. This translates to a historical price-to-earnings ratio of close to 20 and a dividend yield of 4.4%.

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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 Sudhan P doesn’t own shares in any companies mentioned.