Sheng Siong Group: - All Eyes On New Store Opportunities
- 1Q17 PATMI up 4.4%.
- Core operating profit up 15%.
- Estimates kept unchanged.
1Q17 results in-line
- Sheng Siong Group (SSG) reported a set of 1Q17 results that were in-line with our expectations.
- Revenue increased 4.1% YoY to S$217.1m and PATMI grew 4.4% to S$17.1m, meeting 26%- 27% of our full year estimates.
- Revenue was driven by new stores growth of 6.2% (i.e. the four stores that opened in 2016), but this was partially offset by the Loyang store (only re- opened in late Feb) as well as flattish comparable same store sales (SSSG). On the latter, management noted that
- a few stores located in areas near the oil and gas industry were affected,
- the Block 506 Tampines (9.8k sq ft) is undergoing renovation to expand to 25k sq ft and
- there was inevitably slow performance at the Woodlands store that is slated for closure by end Aug.
Steady margins and decent core operating profit growth
- Gross profit margin improved from 24.5% to 25.0% due to higher rebates for bulk handling and promotions. We expect the factors behind GPM to remain supportive for GPM to maintain within a range of 25-26% for full year.
- As the group recorded a relatively higher amount of government grants at S$2.3m in 1Q16 vs. S$0.9m in 1Q17, stripping out ‘other income’, estimated core operating profit saw a decent 15.3% growth.
- As mentioned in previous reports (Sheng Siong Group - A Defensive Business), we keep in mind that SSG’s variable compensation structure can also help to control costs, hence despite the increase in headcount for new stores last year, admin expenses as a percentage of sales were lower at 15.8% vs. 16.1% in 1Q16.
- The eventual impact of store closures for The Verge (Jun-17) and Woodlands (Aug-17) would be seen in 3Q17 onwards.
- Competition remains keen in the industry, while a handful of new stores are expected to be opened this year by SSG’s peers. Against this backdrop, areas that would likely continue to help SSG include the new stores opened in 2016 (includes Yishun Junction 9), the larger Block 506 Tampines store by Jun, as well as any potential renovation for existing stores.
- In addition, opportunities for opening new stores still exist.
- As such, we maintain our BUY rating and S$1.15 fair value estimate.