Sheng Siong Group - CIMB Research 2015-12-09: 2015 was a bumper year for new stores, 2016?

Sheng Siong Group - CIMB Research 2015-12-09: 2015 was a bumper year for new stores, 2016? SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - 2015 was a bumper year for new stores, 2016? 

  • After two years of zero new stores, SSG secured six stores since Dec 14, adding ~7% to existing GFA. This should drive growth for FY16. 
  • Store growth typically come in spurts and during market downturns when rents come off. We are hopeful of more new stores in 2016. 
  • With the investment in China capped at S$6m (SSG has net cash of S$126m), risks are tilted to the upside. 
  • Maintain Add with a target price of S$0.95 (based on 22x CY17 P/E, average 12m forward). The stock offers attractive yields of 4%. 

■ New stores to drive growth in 2016 

  • In 2014, Sheng Siong saw ~20% earnings growth even without new stores as they turned their stores into 24-hour stores and reaped efficiency gains from its central distribution centre. But 2015 was a bumper year for new stores. 
  • Since Dec 14, the group has secured six new stores (+~7% to existing GFA). This should help fuel growth going into 2016, and we are hopeful the group will be able to continue to secure more stores next year as it stands to benefit from a greater supply of housing blocks coming on stream. 

■ Other income to be a feature in 2016, but little visibility thereafter 

  • Another feature of 2015 has been other income. In 9M15, SSG’s other income close to doubled yoy, and formed 17% of net profit. 
  • Other income in 9M15 was supplemented by 
    1. rental income (37% of other income) 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, other components of other income are likely to continue in FY16 but may taper off in FY17. 

■ China investment risks are tilted to the upside 

  • There have been investor concerns over management’s plans to enter China which could possibly burn a capital hole. 
  • We understand the concerns given a slowing Chinese economy and intense competition in the supermarket space. However, management has assured us that they will be cautious and are still looking for suitable sites with the possibility of opening 1-2 stores in FY16, while maintaining its asset-light stance. 
  • With the investment in China capped at S$6m, risks are tilted to the upside, in our view. 

■ Net cash, FCF generative and healthy yields 

  • Sheng Siong has a big net cash pile (~10% of market cap) and a strong FCF business model that supports a 4% dividend yield. 
  • It also has a track record of seeing store growth in spurts, especially when there is a market downturn. 2015 and 2016 could be these growth spurt years. 
  • Coupled with its focus on the budget end, Sheng Siong provides a good hedge to any portfolio in these times.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.95 Same 0.95