RHB Research 2015-07-24: Sheng Siong - More Room For Efficiency. Maintain BUY.

More Room For Efficiency

  • 2Q15 results were generally in line with expectations, with lower-thanexpected SSSG compensated by higher margins. 
  • Maintain BUY, with a SGD1.00 TP (from SGD0.95, 15% upside). 
  • With four new stores in 2015 YTD, we expect revenue growth to remain robust for 2H15 and, with several initiatives and government grants in place, we believe there may be room to increase margins further. 

 Same-store sales growth (SSSG) slowdown for 2Q15. 

  • Sheng Siong’s revenue was up 4.3% YoY, which was contributed mainly by new stores. 
  • SSSG was up a meek 0.3%, which is a slowdown from last quarter’s 2.9%. 
  • Management attributed this to stronger competition, mainly from Cold Storage, which had promoted overall lower prices on 1,000 items during the period under review. 
  • Deeper analysis show that the slowdown in SSSG was mainly from older stores and management would be addressing this via refurbishments. 

 Ongoing margin improvements continue. 

  • Gross margins, on the other hand, continue to show excellent improvements, up 50bps YoY and 80bps sequentially. 
  • This was partly due to the weakening MYR, given that Sheng Siong imports some fresh food from Malaysia. 
  • The company also received government grants for various technology investments this quarter and is likely to continue to doing so for the rest of the year. 
  • Coupled with its ongoing drive for efficiency, margin improvements drove 2Q15 net profit 23% higher YoY to SGD13.6m. 

 Self-checkout counters. 

  • This would be a major initiative, and Sheng Siong expects to install this at seven stores this year and at 10 stores next year. 
  • This reduces cashier requirements by an estimated 30-40%, saves costs and reduces the burden of recruiting more retail staff under its ongoing store expansion plan. 

 Maintain BUY, with a higher TP of SGD1.00 (from SGD0.95). 

  • We keep our estimates mostly unchanged and believe there is still room to grow in the short to medium term. 
  • Store expansion going forward is likely to be supported by the strong Housing Development Board (HDB) new build programme of the last 2-3 years. 
  • We increase our DCF-derived TP to SGD1.00. Maintain BUY. 

(James Koh)

Source: http://www.rhbgroup.com/