Sheng Siong Group (SSG SP) - Maybank Kim Eng 2017-05-02: Cracks Showing

Sheng Siong Group (SSG SP) - Maybank Kim Eng 2017-05-02: Cracks Showing SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - Cracks Showing


1Q17 in line but outlook getting tougher. SELL.

  • 1Q17 was within expectations but we expect a tougher topline growth outlook ahead while margins are approaching a hard upper limit. 
  • We would be particularly concerned about competition from Giant with its wider fresh offerings, a more aggressive RedMart following its acquisition by Lazada as well as the potential entry of Amazon this year. 
  • Maintain SELL, forecasts unchanged. DCF-TP SGD0.85 (WACC 7.1%, LTG 1%).


In-line results but cracks are showing 

  • 1Q17 sales/NP rose 4% YoY on a slight YoY gain in gross margin, in line with full-year forecast. We detect cracks in the results. 
    • One, SSSG is still flat although five stores opened in 2015 are now being counted as old stores. They did not provide a boost as older store sales are contracting.
    • Two, gross margin disappointed, falling 1.3ppt QoQ on higher promotion costs (eg TV shows, lucky draw prizes). It is getting costlier to boost sales through promotions. 
  • On top of that, further margin improvement through bulk handling is limited as its distribution centre capacity only has another 10% to go, with the expansion not kicking in until 2019.


Still the fresh leader but competition raising game 

  • Fresh produce will need to rise beyond 43% of sales to sustain margin gains and Sheng Siong is working on this, but we believe upside is also limited. Management is only willing to guide for 25.5-26% gross margin, with the caveat that there could be downside from higher competition in future. 
  • We note Giant Supermarket has also beefed up its fresh offerings after parent Dairy Farm built its own fresh distribution centre last year.
  • Lastly, Sheng Siong’s ability to gain new sites is uncertain and cannot be relied upon to deliver the same kind of growth as before, in our view.


E-commerce the next biggest threat 

  • Well-capitalised RedMart has beefed up its e-commerce offering in the past few months, with a strong focus on fresh and house brands. It has also launched the LiveUp membership programme featuring rebates/free delivery/free rides and other benefits on RedMart, Lazada, Netflix, UBER and UBER EATS. 
  • Amazon may also launch grocery delivery services in Singapore this year and has already leased a 100,000sf warehouse in Jurong East. We think e-commerce is a credible threat to brick & mortar supermarkets in dense countries like Singapore.


Swing Factors


Upside

  • Higher-than-expected revenue growth on the back of food inflation and more new stores than expected.
  • Better-than-expected food cost savings or lower labour costs following greater automation.
  • Winning of more-than-expected number of tenders for public housing sites for new supermarkets.

Downside

  • Inability to win bids for HDB supermarket sites due to entry of aggressive competitors could lead to delays in new store expansion.
  • China supermarket venture does not take off as successfully as expected.
  • Inability to pass on higher food costs due to increased competition.




Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-05-02
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 0.850 Same 0.850



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