Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-07-31: 2Q17 Results In Line; Finally Secures Two New Stores, But Amazon Enters The Fray


Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-07-31: 2Q17 Results In Line; Finally Secures Two New Stores, But Amazon Enters The Fray SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - 2Q17 Results In Line; Finally Secures Two New Stores, But Amazon Enters The Fray

  • Sheng Siong Group’s (SSG) 2Q17 results were in line with our expectations, with net profit up 6.8% yoy, driven by improvements in gross margins, contributions from new stores and a slight uptick in SSS growth. 
  • The uptick in SSS growth reflects better consumer sentiment in Singapore. However, competition remains fierce. 
  • With Amazon Prime debuting in Singapore, we downgrade the company to a HOLD as dividends are no longer attractive and greater downside risk remains in the event of a price war. 
  • Target price: S$1.06. Entry price: S$0.90.



WHAT’S NEW


2Q17 results. 

  • Sheng Siong Group’s (SSG) results were in line with our estimates with 2Q17 revenue coming in 6.8% higher yoy, mainly attributable to new store openings, and an improvement in SSS growth of 0.9% in 2Q17 (0.1% in 1Q17). 
  • For 6M17, SSG did not open any new stores but the group has secured two new stores located at Fajar Road (4,000sf) and Woodlands St 12 (12,000sf). The stores are slated to open in Sep 17 and Oct 17 respectively.

Margin expansion once again but dividends have been cut. 

  • Gross margins edged up slightly due to slightly more favourable sales mix toward fresh produce and efficiency gains from the central distribution centre. However, SSG has declared a dividend of 1.55 S cents/share for 2Q17 vs a dividend of 1.90 S cents/share for 2Q16. 
  • The group initially committed to a dividend policy of 90% for 2015 and 2016. 
  • We have lowered our payout assumption for 2017-19 from 90% to 70% to reflect the cut in dividends and consider this as a prudent move from the conservative SSG management to build up a bigger cash buffer in the face of heightened competition from both brick-and-mortar supermarkets and e-commerce giants Amazon and RedMart (owned by Lazada).


STOCK IMPACT


Expect more tender wins in 2017. 

  • SSG has won two new supermarkets this year which will add 16,000sf to SSG’s total retail space. On the supply side, our online channel checks at Place2Lease.com indicate a healthy supply of supermarkets up for tender over the next six months through the open tender process. Given the ample supply, we are confident that SSG should end 2017 with at least one more new tender win. 
  • Furthermore, management has also indicated to us that two large supermarkets are currently up for tender through the closed tender process. The closed tender is an invitation to the large supermarket players (NTUC, SSG and Cold Storage) to bid for larger HDB commercial supermarket units. These units are typically in excess of 10,000sf.

Amazon enters the fray. 

  • Amazon announced the launch of Amazon Prime in Singapore on 27 Jul 17. Amazon Prime is boasting a two-hour delivery service which will give consumers access to tens of thousands of products ranging from groceries to electronics and sporting goods stocked at its fulfillment centre in Jurong. 
  • In an effort to strengthen its foothold in Singapore, Lazada launched a membership programme called LiveUp which offers users discounts for RedMart. Our preliminary channel checks indicate fresh produce prices are higher than that of SSG and more comparable to Cold Storage prices at this point of time. 
  • As at 28 Jul 17, Amazon still has some way to iron out its last mile as delivery service is currently down.


EARNINGS REVISION/RISK

  • We adjust our earnings estimate for 2017-19 downward by 1.3-2.2% as we adjust our supermarket forecast to account for the new Fajar Road and Woodlands St 12 supermarkets. We also tweak our SSS growth for 2017-19 down to 1.0% from 1.5% previously.
  • The risk of a price war between Amazon and RedMart remains, and this will cause other brick-and-mortar supermarkets to lower prices.


VALUATION/RECOMMENDATION

  • Even though SSG is back to winning new stores, the risk of a price war between the ecommerce giants presents greater downside risk. 
  • Downgrade to HOLD with a slightly lower PE-based target price of S$1.06 which is pegged to peers 2018F PE of 23.2x. With the cut in dividends, SSG offers an uninspiring dividend yield of only about 3% for 2017.


SHARE PRICE CATALYST

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




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-31
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 1.06 Down 1.090



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