Sheng Siong Group - CIMB Research 2017-05-02: Boringly Stable, 1Q Was A Non-Event

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SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Boringly Stable, 1Q Was A Non-Event

• SSG's 1Q17 net profit (+4.4% yoy) was in line with our expectations and consensus. 1Q17 core net profit formed 25% of our FY17F.
• Retail environment remains tepid. Same-store-sales-growth (SSSG) was flat, but new stores (opened in 2016) helped drive overall sales growth (+4.1% yoy).
• On costs, both gross and operating margins improved marginally as expected.
• Unfortunately, the overhang of a lack of new stores is still present. Sheng Siong has had zero store wins year to date.
• Our earnings estimates and target price are intact. Maintain Hold.

1Q results were in line, no surprises 

• Sheng Siong’s 1Q17 results were mostly a non-event, in our view. Not much has changed in the operating environment with SSSG remaining flat. 
• While new stores opened in 2016 contributed positively to sales growth, this was slightly mitigated by the temporary closure/renovation works at some stores. 
• The other income line item also did well (albeit down yoy) as the group continues to benefit from government grants.
• Overall, no surprises as 1Q net profit rose 4.4% yoy, in line at 25% of our FY17F.

Breaking down 1Q’s sales growth of 4.1% yoy 

• Overall, 1Q group sales (+4.1% yoy) were nothing to shout about. Sales were entirely driven by 
  1. four new stores (+6.2%), 
  2. flat SSSG (+0.1%), but 
  3. dragged down by Loyang (-2.2%) which was closed in Apr 16 and re-opened in Feb 17. 
• The weak SSSG was due to: 
  1. Tampines where renovation works started in late 1Q17, and 
  2. weaker sales at its Woodlands store as residents started to moved out (due to the government’s selective en bloc redevelopment scheme). 
• Ex-Woodlands, SSSG was a better +0.7%.

Gross margins were better yoy, but down qoq on seasonality 

• 1Q gross margins were 25.0%, up 0.5% pt yoy but down 1.3% pts qoq. The sequential drop was as expected, due to seasonality as retailers typically push for volumes during the CNY festivities. CNY festivities also typically bring about a higher mix of grocery sales; which have lower margins vs. fresh food. 
• Overall, FY17F gross margins are expected to be in the 25.5-26% range.

Operating expenses stable as expected 

• The group also did well to keep operating expenses in line, with 1Q’s SG&A/sales improving to 16.7% (1Q16: 17.0%). The slight improvement came from 
  1. a net savings in rental following the purchase of its Bedok store, and 
  2. lower bonus provisions for staff. 
• Sheng Siong has always been able to keep its opex very stable and we see no change in this department.

Maintain Hold, no catalysts in sight 

• 1Q results were in line with our expectations and we keep our earnings forecasts unchanged. 
• Similarly, our Hold call and TP of S$0.94 (still based on 23.3x CY18 P/E, 3- year historical mean) are intact as we do not see any catalysts given the lack of new store wins and current competitive bidding environment. 
• Upside/downside risks include new store wins/margin compression. The China store (due to open in 3Q17) remains a wildcard.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-05-02

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.940 Same 0.940