Sheng Siong Group (SSG SP) - Maybank Kim Eng 2016-10-27: Reputation For Resilience Intact

Sheng Siong Group (SSG SP) - Maybank Kim Eng 2016-10-27: Reputation For Resilience Intact SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - Reputation For Resilience Intact


3Q16 soft; forecasts cut but not deal-breaking 

  • Post a soft 3Q, we cut forecasts 3% to reflect more subdued demand; DCF-TP also cut to SGD1.06 from SGD1.13. 
  • Despite two big store closures next year, we expect FY17E/18E revenue to still grow, albeit at single-digit levels, and earnings to remain resilient due to weak supplier power and a continuing shift to more fresh food. 
  • Maintain HOLD. 
  • Investors may still hold on to Sheng Siong for its defensive earnings and reasonable yield, but upside will be limited. 
  • Main risk to call is a breakout of price wars, which we rate as low probability for now.


Topline slowed but profit still grew on lower costs 

  • 3Q16 sales growth was the weakest since 2013, and seasonality has also tapered to just +7% (vs past years’ 11-12%). 
  • Management attributed this to consumer belt-tightening for the most part, and partly due to rising layoffs of foreign workers. 
  • But earnings was resilient. Margins were maintained on lower product cost and more sales of fresh foods. Supermarkets’ bargaining power with suppliers has strengthened amidst weak demand, while rising labour and rental costs have also moderated.


Earnings to stay resilient even post-forecast cuts 

  • We cut FY16E-17E earnings by 3% as we adjust psf revenue assumptions to reflect more subdued demand expectations. 
  • DCF-TP cut to SGD1.06 post-adjustments. 
  • Despite two big store closures next year (The Verge and Woodlands Centre), management still expects single-digit revenue growth. This is in line with our 3.9% growth forecast. 
  • With supplier power remaining weak and other opex trends in the company’s favour, we believe earnings can also stay resilient in FY17E, up 3.4%.


Key risk to our call: breakout of price wars 

  • Despite some softness in demand, people still have to eat and we do not expect Sheng Siong’s foreseeable earnings to crack in a major way. The current soft sales merely reflect general consumer belt-tightening more than a hollowing out of the foreign worker base, where the impact is limited to 3-4 stores out of a total of 42. 
  • The main risk to our call is a breakout of price wars by NTUC or Giant, which we do not see happening yet as margins are generally being maintained despite soft sales.


Swing Factors


Upside

  • Higher-than-expected revenue growth on the back of food inflation and more new stores than expected.
  • Better-than-expected food cost savings or lower labour costs following greater automation.
  • Winning of more-than-expected number of tenders for public housing sites for new supermarkets.

Downside

  • China supermarket venture does not take off as successfully as expected.
  • Inability to pass on higher food costs due to increased competition.




Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-27
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.06 Down 1.130



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