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