Sheng Siong Group (SSG SP) - UOB Kay Hian 2016-10-28: 3Q16 Results In Line, Challenging Outlook Ahead

Sheng Siong Group (SSG SP) - UOB Kay Hian 2016-10-28: 3Q16 Results In Line, Challenging Outlook Ahead SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - 3Q16 Results In Line, Challenging Outlook Ahead

  • SSG’s 3Q16 results are broadly in line with our expectation. The company continues to keep costs under control amid a challenging environment. Competition for retail space is high but management will continue to bid for new and upcoming units in a rational manner. 
  • Maintain HOLD with a lower PE-based target price of S$1.12.



WHAT’S NEW


In-line 3Q16 results. 

  • Sheng Siong Group’s (SSG) results are in line with our expectation with 3Q16 revenue coming in 1.2% higher yoy mainly attributable to new store openings.
  • Comparable same-store sales (SSS) fell by 1.15% yoy in 3Q16, reflecting weak operating conditions and intense competition that the supermarket industry is facing in Singapore.
  • Gross margin edged up slightly due to a slightly more favourable sales mix as the group saw a 50bp increase in fresh food sales as a percentage of total sales.

Gross margin edges up. 

  • Gross margin trended up from 24.3% in 3Q15 to 25.9% in 3Q16 due to lower input prices resulting from higher rebates in 3Q16. The rebates were given for volume display and for providing bulk handling services on behalf of suppliers.
  • Expect competition among supermarket suppliers to remain very fierce going into 2017 as the local economy slows and consumer sentiment dampens. We forecast gross margins of 25.5-25.7% for 2016-18 to be achievable for the group.


STOCK IMPACT


Competition for new HDB commercial units to remain strong. 

  • In the next 6 months, there will be a total of 7 new supermarket commercial units available for tender, of which we expect SSG to tender for a majority of the units available. However, NTUC Fairprice, Giant and other smaller supermarket players are also expected to put in bids for the limited units available. 
  • Given management’s prudence when it comes to expanding, we expect SSG to only put in competitive bids which they are confident of profitability. This might result in them securing little to no new outlets if a bidding war happens. 
  • In the case that attractive new retail space goes up for sale, we expect SSG to utilise their clean balance sheet to purchase these units which may require borrowings as capex has been very heavy this year due to the purchase of the Bedok store, progress payments for the purchase of retail space at Yishun and the upgrading of warehouse facilities.

The Verge. 

  • In Sep 16, Lum Chang Holdings and LaSalle Investment Management Asia acquired The Verge, a struggling mall in Little India for about S$189.8m. 
  • Our channel checks indicate that both parties intend to tear down the mall and build in its place serviced residences with some retail and office space in the same complex. 
  • SSG currently has a large supermarket in The Verge with a lease slated to expire sometime in Mar 17. We believe that contribution from this supermarket has not been too significant considering its size due to weak SSS growth mainly due to construction works in the vicinity. 
  • We opt to wait for further developments before adjusting our estimates.

Delay in opening of Kunming China. 

  • The completion of the construction of the mall in Kunming China where SSG has leased retail space to operate a supermarket has been delayed. The group has not been able to obtain a firm handover date from the landlord and expects the opening to happen sometime in 2Q17.


EARNINGS REVISION/RISK

  • We have revised our net profit estimates downward by 0.8-1.0% for 2016-17 to account for the delay in the opening of the China supermarket.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a lower PE-based target price of S$1.12. This is pegged to peers’ 2017F PE of 25.1x, SSG offers an attractive dividend yield of 3.4% for 2017. 
  • We reiterate our view that most of the positives have been priced in and we would be buyers closer to S$1.00.


SHARE PRICE CATALYST

  • A pick-up in SSS growth.
  • Chinese expansion surprising us on the upside.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-28
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.12 Down 1.130




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