Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-02-27: 2016 Results In Line; A Safe Haven

Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-02-27: 2016 Results In Line; A Safe Haven SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - 2016 Results In Line; A Safe Haven

  • Sheng Siong Group (SSG)’s 2016 results came in very much in line with our expectation. 2017 will be a year of margin enhancement initiatives and outlet network expansion to areas where the company has no presence. 
  • Comparable SSS growth in Singapore remains sluggish amid intense competition but SSG’s drive for a higher mix of fresh produce should bear fruit through higher margins. 
  • We maintain our BUY recommendation on SSG with a lower PE-based target price of S$1.08.



WHAT’S NEW


2016 results in line. 

  • Sheng Siong Group’s (SSG) results are in line with our estimate with 2016 revenue coming in 4.2% higher yoy, mainly attributable to new store openings.
  • Comparable same-store sales (SSS) rose by 0.2% for 2016, reflecting weak operating conditions and intense competition in Singapore’s supermarket industry. 
  • Gross margin edged up slightly due to a slightly more favourable sales mix and higher rebates from suppliers given for special promotions, volume, display and bulk handling. 
  • Net profit for 2016 came in at S$62.7m which is 2% higher than our estimate of S$61.4m.

2016 revenue psf up 0.9% yoy. 

  • SSG’s revenue per sf has grown at a 2.2% CAGR from 2011-16. 2016 revenue per sf stood at S$1,826 due to an increased number of smaller stores which generate higher revenue per sf than larger supermarkets. 
  • 2017 will see the closure of two large supermarkets (at The Verge and Woodlands) which collectively account for more than 86,000 sf in selling space. 
  • 2017 should continue to see growth in revenue per sf as lost revenue from these closures should likely be offset by new and smaller HDB supermarkets even though total selling space should fall.


STOCK IMPACT


Higher gross margins moving forward. 

  • SSG’s gross margins have grown from 22.1% in 2012 to 25.7% as of 2016. The main drivers behind the group’s gross margin expansion were a higher proportion of fresh food in its sales mix, better purchasing power and rebates from suppliers. 
  • Moving forward, we believe there is room to grow gross margin further as our channel checks indicate that some of SSG’s top performing outlets have fresh food sales forming more than 50% of sales while the average for the group stands at only 42%. Some old stores in mature housing estates have seen declining SSS and the company may commence a major re-fitting for these stores to address the decline.

Possible warehouse expansion. 

  • SSG is already operating its central warehouse at Mandai Link at a 90% utilisation rate. SSG is currently exploring the possibility of expanding its central warehouse this year and potentially adding another 10% to its total central warehouse space. 
  • We estimate that this would cost the group around S$20m if the plans materialise.

Irrational bidding for small supermarket space. 

  • In our previous update, we highlighted that competition for new smaller HDB commercial units remains intense as smaller players such as Yes and Ang Mo Supermarket have driven up the prices for these units.
  • Our online channel checks indicate that SSG, NTUC FairPrice and Cold Storage have not won any of the small supermarket tenders for some time. We reiterate our view that given the irrationally high rental prices some of these supermarkets are going for - it is a matter time before some of them throw in the towel which could give the big players the opportunity to secure units at more reasonable rates. The group will prioritise expansion into areas in Singapore where they do no not have a presence (eg Hougang).


EARNINGS REVISION/RISK

  • We introduce our 2019 earnings estimate and have revised our net profit estimates downward by 0.7-2.2% for 2017-18 due to slightly higher-than-expected administrative expenses.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower PE-based target price of S$1.08 (previously S$1.12). 
  • We roll forward our valuation base to 2018 and peg it to peers’ 2018F PE of 23.2x, SSG offers an attractive and very sustainable dividend yield of 4.1% for 2017. 
  • SSG maintains a strong balance sheet with zero debt and a net cash position of S$63.5m (S cents 4.2/share).


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/ 2017-02-27
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.08 Down 1.120



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