Sheng Siong Group - DBS Research 2015-10-23: Coming together nicely

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Coming together nicely

3Q15 earnings in line, driven by new stores
Store expansion on track, margins set to improve going forward, long-term drivers intact
Maintain BUY and S$1.01 TP

Earnings of S$14.4m (+19% y-o-y) were in line with our expectations, driven by revenue growth and margin expansion. The strong revenue growth (S$200m, +7.3% y-o-y) was backed by SSSG of +1.1% and new store contribution of +6.2%.
Margins were better than 3Q14 on gross margin expansion and lower opex. However, both gross and EBIT margins were sequentially lower mainly due to lower pricing for SG50 and seventh month festival promotions.
Input prices were also a tad higher as
1. deliveries for fresh food were disrupted due to the haze, and
2. to some extent, a stronger USD.
Otherwise, opex as a percentage of sales was both lower sequentially and compared to 3Q14.

On track for store expansion, margins to improve going forward, longer-term drivers continue to develop.
Sheng Siong has secured another store in Dawson (4,300 sqft) and will have a total of 39 stores by year-end. This is in line with our expectations. The target is to reach 50 stores in Singapore eventually.
We see margins normalising going into 4Q15.
1. Input prices for fresh food should ease as logistical disruption and the haze clears up;
2. pricing should be less aggressive post SG50 and seventh month promotions.
Online initiative remains in the pilot phase. We continue to see online sales for grocery retail in its infancy in Singapore and therefore believe Sheng Siong can afford to develop this business over a longer time frame.
Developments in China continue to be on securing suitable sites in Kunming. As the grocery retail scene in China is facing intensifying competition, especially from online channels, we also believe time is on Sheng Siong’s side to land the ideal location.

Our target price for Sheng Siong is S$1.01 based on 25x FY16F PE. Valuation is pegged to below +1SD of its historical mean and below regional peers' average of 27x PE.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2015-10-23

DBS Vickers SGX Stock Analyst Report BUY MAINTAIN BUY 1.01 UP 1.00