Sheng Siong Group - CIMB Research 2016-02-24: New stores to compensate negative SSSG

Sheng Siong Group - CIMB Research 2016-02-24: New stores to compensate negative SSSG SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - New stores to compensate negative SSSG 

  • Negative same store sales (SSSG) not a concern; mostly store specific. 
  • When it last saw negative SSSG in 2013 due to similar reasons, the subsequent rebound was strong at 1-5%. 
  • New stores opened in 2015 experiencing high growth and will more than mitigate any potential negative SSSG. The sweetener is potential upside to gross margins. 
  • No change to our forecasts or target price. Maintain Add. 

■ 4Q15 decline in same store sales should not be a prolonged effect 

  • Management went to great lengths to explain 4Q15’s 1.7% yoy contraction in SSSG during this morning’s analyst briefing. 
  • Overall, our concern that the decline signaled loss of market share were alleviated and we think the contraction was due more to stores-pecific reasons than structural reasons. 

■ Most of the impacted stores faced store-specific reasons 

  • Reasons for the decline were: 
    1.  renovation works at and around the vicinity of two stores (out of 33 comparable stores), 
    2.  fall in liquor sales in the Geylang store after new alcohol sale restrictions, 
    3.  weak sales at its Woodlands store after the ringgit depreciation, 
    4.  weakness at old stores that require re-fitting works, and 
    5.  competitive pressures at stores with new rival supermarkets. 
  • On a balance, ~60% of comparable stores saw declining SSSG but the bulk of the causes of decline were store-specific. 

■ Case of 2013’s negative SSSG and subsequent rebound 

  • This was also not the first time Sheng Siong saw declining SSSG. The last time was over the 4Q12 to 3Q13 period when some stores were closed for renovation or had construction works in the vicinity. SSSG recovered to healthy 1-5% levels in the following quarters. Therefore, we remain unperturbed. 
  • Even if near-term pressure on SSSG persists as old stores are earmarked for major re-fitting works, we are confident SSSG will eventually recover. 

■ New stores to more than mitigate drag from negative SSSG 

  • Along with the five stores opened in 2015, the new Circuit Road and Yishun J9 stores (due to open in 2Q16) will add a total of c.49k sf of GFA (+12% to existing space). We expect this to drive topline growth and more than compensate for any potential SSSG decline. 
  • The last time the group went through a similar phase in 2012 when it opened eight new stores (or 15% of existing space then), the new stores contributed 9.9% of sales growth in FY13. We expect more of the same. 

■ 4Q15 gross margins improved to 25.0% (FY15: 24.7%; FY14: 24.2%) 

  • The efficiency gains from its central distribution centre and direct purchasing initiatives continue to show up in improved gross margins. Management highlighted that this is a level they think is sustainable, while also indicating that there is potential to improve this further by ‘a few basis points’. We were very impressed. 

■ Maintain Add with 4% yield at current levels 

  • No change to our target price (still based on 22x CY17F P/E, historical mean) (S$0.95).

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2016-02-24
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.95 Same 0.95