Sheng Siong Group - DBS Research 2016-09-29: Anticipate higher margins

Sheng Siong Group - DBS Vickers 2016-09-29: Anticipate higher margins SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Anticipate higher margins


Maintain BUY, more positive on margins. 

  • We maintain our BUY recommendation on Sheng Siong, even though the stock has gained c.12% since our last update. 
  • We continue to like Sheng Siong for its earnings growth traction, efficient operations, strong ROE, and net cash balance sheet. 
  • We are now more positive on gross margins as we believe the run rate of 26% in 2Q16 will be sustainable. Maintain BUY for 15% upside including dividends.


Anticipate higher gross margins. 

  • We revise our gross margin assumption to 26% at 2Q16’s current run rate, which we believe is sustainable. 
  • We believe more can be done for gross margin to expand through direct sourcing, house brands, and higher mix of fresh food. There is still room to increase direct sourcing of fresh products especially vegetables from farms regionally. 
  • Cutting off middlemen would contribute to improving gross margins. Higher-margin house brands currently contribute below 10% of turnover and improving the company's house brand mix will support margin improvement. Finally, fresh food mix can increase due to supermarkets' displacement of wet markets. 
  • We raise FY16-17F earnings by 7-8% led by higher gross margin assumption of 26%. 
  • In store updates, the new Junction 9 store has commenced operations earlier this month, while the new Kunming store, which is scheduled to start in 2H16, will be postponed to 1H17 due to delays in property handover. 
  • Our forecasts are not significantly affected by the delay.

Valuation

  • Our target price for Sheng Siong is S$1.18 based on 25x FY17F PE. The valuation is pegged at below +1SD of its historical mean and below regional peers' average of 27x PE.

Key Risks to Our View

  • Store openings, price competition. Revenue growth will be led by new store openings. Excessive discounts and promotions in the market by competitors will ultimately result in lower margin.




Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-09-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.18 Up 1.090



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