Sheng Siong Group - CIMB Analyst Report 2015-10-26: 3Q15 post-briefing update

Sheng Siong Group - CIMB Analyst Report 2015-10-23: 3Q15 post-briefing update SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - 3Q15 post-briefing update 

  • Market dynamics for supermarkets in 3Q15 was about sacrificing ASPs for volume. 
  • GPM positives from SSG’s direct purchasing and central distribution centre are still intact; the qoq dip was a function of sales mix, lower prices and weather conditions. 
  • Ex one-off S$0.8m gain, components of other income are likely to remain in FY16. 
  • Five new stores in FY15, adding c.26k sq ft of GFA (or 6.5% increase to total). 
  • Maintain Add, as we roll forward to CY17. Dividend yield of 4% remains attractive. 

What’s going on in the supermarket business in 3Q? 

  • 3Q15 was all about volume: 
    1. retailers were pushing for volumes and willing to sacrifice ASPs in the process, particularly as consumer sentiment remains weak and in part due to the “SG50” celebrations; and 
    2. while volumes still grew yoy, the level of growth has come off. 
  • These dynamics accounted for 3Q15’s same-store sales (SSSG) of +1.1% yoy, which is slightly better than 2Q (+0.3% yoy). 
  • We expect 4Q SSSG to improve slightly (1.5-2% range) as SG50 discounts have passed but macro retail remains weak. 

Explaining the qoq dip in gross margins to 24.3% (2Q15: 25.2%) 

  • Players typically push for volumes twice a year – during Chinese New Year and Lunar Seventh Month. The key difference is the mix of fresh/groceries where it is tilted towards lower-margin groceries during the Seventh Month. 
  • Compounding this were weather conditions (haze-related) that disrupted fresh supply. While input prices rose, the keen competition and push for volumes meant that SSG took the decision not to pass on costs. This is likely to be one-off and we expect GPM to trend up from 3Q’s level. 

Earnings beat came from other income (19% of 3Q15 net profit) 

  • In addition to the usual sale of scrap materials, other income in 9M15 has been supplemented by 
    1. rental income (37% of other income), especially from the leasing of excess space at its Tampines store, 
    2. government grants (32% of other income), and 
    3. a one-off advertising event for suppliers (11% of other income). 
  • Apart from the one-off event, the remainder is likely to continue in FY16 while rental income (Tampines lease expiring in end-16) and grants should taper off in FY17. 

New stores are smaller but have higher sales psf 

  • SSG added five new stores this year (+6.5% to total GFA) and expects to continue securing more stores next year as new supply comes to market. While these new stores are typically smaller (4k sq ft vs. existing ~12k sq ft), management cites higher sales psf (up to 3x more), partly due to the higher footfall from being located in HDB hubs. 

EPS cuts from store closure and renovation of older stores 

  • We cut FY16-17 EPS by 3-7% as we factor in: 
    1. renovations at older stores, with the biggest impact coming from 
    2. the closure of its 40k sq ft Woodlands store in 2Q17; and 
    3. likely smaller-sized new stores. 
  • Our TP rises to S$0.95 as we roll it forward to 22x CY17 P/E (average 12m forward). 
  • On China, management guides that it is in the process of looking for suitable sites with the possibility of opening 1-2 stores next year, while maintaining its asset-light stance.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2015-10-26
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.95 Up 0.93