Sheng Siong Group - 4Q16 Unexciting outlook; Take profit
- 4Q16 net profit (S$15.4m, +5.7% yoy) was in line with expectations. We deem FY16 core net profit broadly in line, at 98% of our forecast.
- However, we now expect investor focus to turn to: 1) the lack of new stores, and 2) muted same-store sales growth.
- Sheng Siong is on the verge of losing two big stores this year (which formed total 8.6% of FY16 sales). We think the company will struggle to plug these big holes.
- We also foresee risk to the group’s other income line, which was at an unsustainably high level in FY16 and lifted group earnings for the year.
- We cut FY17-18F EPS by 5-17% for lower sales assumptions. Downgrade to Hold.
4Q16 earnings in line
- Sheng Siong reported a steady set of 4Q16 results, with core net profit in line with our and Bloomberg consensus expectations. 4Q16 net profit rose by a respectable 5.7% yoy on the back of 5.3% sales growth.
- Positives were continued gross margin improvement (4Q16: 26.3%, 4Q15: 25.0%, 3Q16: 25.9%), driven by supplier rebates, continued bulk handling services and higher mix of fresh produce.
- We think the impressive 4Q16 gross margin is sustainable.
- Operationally, the company is doing well and margins are high.
Lack of sales drivers
- Our grouse is sales, as we are troubled by:
- the lack of new stores,
- lacklustre environment, which contributed to muted same-store sales growth in 4Q16, and
- store closures.
No new store announcements since 2H16
- Sheng Siong opened four new stores in FY16, adding c.25k sq ft of space (or c.6% to GFA). These new stores were key to the group’s 4.2% sales growth in FY16, made up by new stores (+6.2%), same-store sales growth (+0.2%) and store closures (-2.2%). However, the group has not announced any new stores since 2H16.
- Moreover, competition for retail space remains heightened and bidding is tough as smaller supermarket operators have been aggressively bidding up rents at new HDB shops.
Flat same-store sales growth expected for FY17F
- Retail sales have generally been weak and are not expected to improve in significantly this year, especially as the Singapore economy is only expected to expand by 1-2% in 2017.
- Management sounded lukewarm on the retail environment and expects lacklustre demand this year. Accordingly, both 4Q16 and FY16 same-store sales growth was muted at +0.2% yoy.
- The cost-conscious consumption environment poses further risk to the group’s ability to pass on any cost increases.
Store closures are likely to cause sales decline in 1Q18F onwards
- Sheng Siong is on the verge of losing two big stores in FY17F:
- the Verge (c.45k sq ft, due for closure in May), and
- Woodlands Checkpoint (c.40k sq ft, Aug closure).
- These are not the group’s best-performing stores but they still contributed a significant combined 8.6% of FY16 sales. The closures, coupled with the lack of new stores, lead us to think that group sales will start to decline in 1Q18F.
Downgrade from Add to Hold; stock fully valued
- We cut FY17-18F EPS by 5-17% as we update our sales and store growth assumptions. Accordingly, our target price falls to S$0.94, still based on 23.3x CY18 P/E (3-year historical mean).
- Downgrade from Add to Hold.
- Upside/downside risks include new store wins/margin compression.