Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-05-03: 1Q17 Results In Line, No New Stores Yet

Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-05-03: 1Q17: Results In Line; No New Stores Yet SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - 1Q17: Results In Line; No New Stores Yet

  • 1Q17 results were in line with our expectations. Net profit grew 4.3% yoy, driven by improvements in gross margins. 
  • Comparable SSS growth in Singapore remains sluggish amid intense competition, but the period of irrational bidding for new supermarket space appears to have normalised. 
  • Since our upgrade in Jan 17, SSG’s share price has returned about 5%. 
  • Maintain BUY with a slightly higher PE-based target price of S$1.09.



WHAT’S NEW


1Q17 results in line. 

  • Sheng Siong Group’s (SSG) results were in line with our estimates with 1Q17 revenue coming in 4.1% higher yoy, mainly attributable to new store openings.
  • The group opened four new stores in FY16 with a total retail area of about 25,000sf.
  • Comparable SSS grew marginally by 0.1% for 1Q17, reflecting the weak operating conditions and intense competition that the supermarket industry is facing in Singapore.
  • There was a noticeable slowdown in areas affected by the slowdown in the oil and gas industry in Singapore (eg Jurong). There were also ongoing renovations to Block 506 Tampines and the Woodlands outlet as residents moved out. Both these factors accounted for the flattish SSS for the quarter.

Margin expansion once again. 

  • Gross margins edged up slightly yoy due to slightly more favourable sales mix and higher rebates for bulk handling and promotions. 
  • We estimate that SSG’s fresh food sales as a percentage of total sales has edged up slightly from 42% to 43% from 4Q16 to 1Q17. 
  • The group’s gross margins fell 1.3% qoq in 1Q17, in line with seasonal trends where industry players tend to push for more volume-driven sales during the festive Chinese New Year season. We expect a seasonable pick-up in gross margins going into 2Q17.


STOCK IMPACT


The end of irrational bidding? 

  • 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. However, the situation appears to have normalised now, as out of the last nine bids for HDB supermarket units, NTUC has won two bids, Cold Storage has won one bid, and the balance won by the smaller supermarket players. 
  • Even though SSG has yet to win new supermarket space, we are optimistic that they will end 2017 with at least one new supermarket. There are currently 4-5 HDB commercial supermarket units upcoming for bidding with the next bid slated on 8 May. 
  • Other than HDB commercial units, SSG has also been approached by private parties regarding the opening of supermarkets, but negotiations have thus far been unsuccessful.

Small players balking at lofty bids. 

  • Also in our previous update, we highlighted the possibility that smaller supermarket players might find it difficult to sustain the lofty bids that were submitted. In Mar 17, there was a rebid on a HDB commercial unit in Tampines which was previously awarded to a smaller supermarket player at about S$21psf. Upon rebidding, the winning bid came in at only about S$15psf. SSG’s bid was not too far off at S$14psf. We have forecasted one new supermarket opening for 2017.
  • SSG’s bidding strategy remains biased toward areas in Singapore where it does not have a strong presence, such as Woodlands. SSG currently has a 41,500sf outlet in Woodlands which will close in Aug 17 due to redevelopment in the area.

Kunming outlet will finally open for business. 

  • SSG has finally take possession of the leased retail space in the Kunming shopping mall in China. It is under preparation and is on track to open by the end of 3Q17. 
  • We re-iterate our view that the Kunming supermarket’s performance could turn out much stronger than we anticipated. However, even if it fails, SSG’s downside is limited to US$6m.

Static e-commerce efforts. 

  • We estimate that out of SSG’s 1Q17 sales, e-commerce related turnover accounted for less than 1% of total sales. 
  • In the face of rising competition from NTUC, Redmart and possibly Amazon, SSG has not expanded its ecommerce presence in Singapore. We attribute this to the conservative nature of SSG’s management. However, we believe the company should be taking a much more aggressive approach to expanding its e-commerce reach in Singapore.


EARNINGS REVISION/RISK

  • We adjust our earnings estimates upward for 2018-19 by 1% as we cut our capex assumption for 2017 from S$30m to S$15m for the Mandai warehouse expansion. This lowers our depreciation for 2018-19.


VALUATION/RECOMMENDATION

  • Maintain BUY with a slightly higher PE-based target price of S$1.09, pegged to peers’ 2018F PE of 23.2x. 
  • SSG offers an attractive and sustainable dividend yield of 4% for 2017 with a strong balance sheet with zero debt and net cash of S$68.3m as of 1Q17.


SHARE PRICE CATALYST

  • A pick-up in same-store sales growth.
  • Higher-than-expected new store openings.
  • Chinese expansion surprising us on the upside.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.090 Up 1.080



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