Sheng Siong Group - RHB Research 2015-09-28: Expect More Margin Improvements

Sheng Siong Group - RHB Research 2015-09-28: Expect More Margin Improvements SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - Expect More Margin Improvements 

  • Maintain BUY, with a DCF-derived TP of SGD0.97 (from SGD1.00, 15.4% upside). 
  • We expect Sheng Siong’s SSSG to remain soft into 3Q15, partly due to the tepid spending environment. 
  • However, this may be more than made up for by steady margins this year, partly from weakening regional currencies. 
  • In the medium term, we also expect it to benefit from further efficiency enhancements, including the use of automated self-checkout systems. 

 SSSG to remain soft into 3Q15. 

  • We expect Sheng Siong to report flattish same-store sales growth (SSSG) in its 3Q15 results, a continuation of the weakness recorded in 2Q15 (SSSG: 0.3%). We believe this may be due to combination of the tepid spending environment as well as the fact that its current portfolio comprises very mature stores (only one new store was added in 2013-2014). 
  • We expect YoY revenue and net profit growth of 4.5% and 20% for 3Q15 (SGD14.6m) respectively. 

 Benefiting from lower costs. 

  • Sheng Siong sources many of its fresh produce directly from Malaysia, especially vegetables. Lower food prices as well as a stronger SGD vs regional currencies will likely help hold gross margins steady, despite stiffer competition this year and the weaker spending environment. 

 Self-checkout will help alleviate manpower shortage. 

  • Sheng Siong is increasing the number of stores with self-checkout facilities to seven from one by end-2015, and by another 10 for 2016 – which brings it to almost half of its total store count. 
  • We believe some fine-tuning needs to be done during the early stage of operating its hybrid self-checkout system to maximise cost savings, which could be up to 25% of cashier wages or 5% of operating expenses. This alone could widen its net profit margin by 70bps (or lift its net profit by 10%). 

 Store expansion plans on track; maintain BUY. 

  • The key catalyst this year could be the addition of more stores (four YTD). The new self-checkout initiative may ease ongoing manpower issues in Singapore, thereby allowing Sheng Siong to expand more easily. 
  • We trim our FY15F earnings by 2% and reduce our DCF-derived TP to SGD0.97. 

James Koh RHB Securities | http://www.rhbgroub.com/ 2015-09-28
RHB Securities Analyst Report BUY Maintain BUY 0.97 Down 1.00