CIMB Research 2015-07-23: Sheng Siong Group - Upside from gross margins. Maintain ADD.

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Upside from gross margins 

• Sheng Siong’s 2Q15 results were broadly in line with expectations. 
• While weak local demand and increased competition from retailers offering “SG50” discounts contributed to flat SSSG (+0.3% yoy), sales from five new stores and an 80bp qoq improvement in gross margins lifted net profit to S$13.6m (+23% yoy), forming 25% of our and consensus full-year forecasts. 
• Though no new store additions were announced in 2Q, we lift our FY16-17 EPS forecasts by 3.5% to reflect higher gross margin assumptions. 
• Our target price rises to S$0.93, still based on 22x CY16 P/E (average 12M forward). Maintain Add. 

Tepid same store sales growth 

• 2Q15 sales expanded 4.3% yoy to S$179m, driven by five new stores (+4%) and same-store sales (+0.3%). 
• Looking ahead, there is cause to be more positive on the growth from the new stores, given that three of the five new stores were only open for about half of 2Q. However, lacklustre local economic conditions coupled with tepid demand post Chinese New Year caused a drag on same store sales growth (SSSG). 
• 2Q15’s flat SSSG (vs. +2.9% in 1Q15) also reflects intensified competition from retailers offering special “SG50” discounts. For example, NTUC FairPrice announced an initiative providing a 10% discount on its range of housebrand products. 
• Gross margins continue to trend up 2Q15 gross margin improved to 25.2% (1Q15: 24.4%), driven by lower input costs from its direct purchasing initiatives and efficiency gains derived from its central distribution centre. 
• In addition, we suspect 
  1. an improvement in sales mix in favour of higher-margin fresh produce (36% GPM vs. 18% for groceries), and 
  2. a weaker ringgit (40-50% of its grocery is sourced from Malaysian suppliers) 
  also helped. 
• With operating expenses remaining stable (2Q15’s opex as a % of sales was 17.6%, compared with 17.0-17.4% over the past four quarters), improvement in gross margins flowed straight to the group’s bottomline, boosting 2Q15 net margin to 7.6% (1Q15: 7.1%). 

Interim dividend of 1.75 Scts declared (95% payout) 

• We continue to like the stock’s high payout ratio (consistently >90%), which we think is sustainable given its strong operating cashflows and low capex requirements. 
• The biggest remaining capex is for its Yishun Junction 9 store (S$34m outstanding to be spread across FY15-17).

(Kenneth NG, CFA; Jonathan SEOW)

Source: http://research.itradecimb.com/