Phillip Securities Research 2015-07-30: Sheng Siong Group - Poised to ride the cyclical upturn. Downgrade to ACCUMULATE.

Poised to ride the cyclical upturn 

  • Higher 2Q15 revenue and net profit in line with PSR/consensus estimates 
  • Flattish comparable same-store sales growth (SSSG) as competition intensified and some old stores in mature housing estates underperformed. Continue to rejuvenate such stores. 
  • Downgraded rating to “Accumulate” with lower TP at S$0.96, to account for higher FY15F EPS (better than expected margin). 

Analyst briefing key takeaways 

 New stores to drive sales amid challenging backdrop – 

  • The five new stores at Penjuru (Dec-14), Tampines (Jan-15), Punggol (Apr-15), Bukit Panjang (May-15), and Pasir Ris (Jun-15), which added ~5.4% to SSG’s retail space by 1H15, have bolstered SSG’s sales. 
  • Lower volume due to tepid post-CNY demand and intensified competition (in conjunction to SG50 celebration) has brought same-store sales down to a marginal growth of 0.3% from 2.9% in 1Q15. 

 Continuing margin enhancement initiatives – 

  • SSG remains committed to improve the sales mix and reduce input costs by capitalising on Mandai distribution centre (more direct sourcing and bulk handling). 

 Utilizing downtime during store renovations – 

  • Management shared that SSG will continue to renovate old stores to revive footfall. It will be renovating one of the underperforming stores in 2H15. 
  • During renovation, a self-payment system will be installed. The self-payment machines will not only enhance customers’ experience (accelerate payment process), but also save manpower cost (fewer staff needed for cashier counters) and enable SSG to redeploy existing staff to new stores (so that issues like a manpower shortage in new stores should not impede growth). 
  • Currently, only the new store in Segar Road has implemented such a system. SSG targets to have a total of 7 stores running on this system by end-2015, and another 10 stores next year. 

 Growth story remains intact – 

  • Prudent management continue to search for expansion opportunities (both domestic and overseas) especially in areas where SSG does not have a presence. 
  • However, competition for local retail space has not abated. The JVC with LuChen Group in Kunming, China, could open its first store towards the latter part of FY2015. 
  • Meanwhile, SSG will focus on nurturing growth of new stores and rejuvenating old stores. 

How do we view this? 

  • SSG’s 2Q15 performance affirms our optimistic view on its outlook. 
  • We think that SSG’s growth strategy will position it to capture market share when the business cycle turnaround. 
  • We have adjusted our FY15F/16F numbers to account for contribution from the new stores. 

Investment Actions 

  • We downgrade to “Accumulate” rating with a lower TP of S$0.96, down from S$1.00 previously. 
  • This is based on higher FY15F EPS and a P/E ratio of 25.0x, which is lower than the 27.1x used previously. 

(Soh Lin Sin)

Source: http://www.poems.com.sg/