Sheng Siong Group - Phillip Securities 2016-02-25: 3 Time-Proven Growth Strategies

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - 3 Time-Proven Growth Strategies

Sales held up by new stores and GPM improved on challenging business environment.
Additional 31k sqft retail space or 7% increase in total retail area over the next 2 years.
Maintain Accumulate rating with a TP at S$0.97 based on estimated 4.20 cents FY16 EPS and a PER ratio of 23x.

Economic slowdown and haze had negative impact on demand. Stronger SGD against South East Asia currencies have lowered input prices but also kept regional tourism at bay. On the other hand, SG50 celebration induced intensive competition but also lifted volume. Regulatory changes on alcohol sales caused structural change in certain stores.
SSG’s FY15 revenue grew 5.3% yoy and net profit increased 19.3% yoy with improved GPM.
1. Slower turnover at comparable same store sales. 9MFY15 same store sales growth (SSSG) was 1.4% yoy, but weighed by drastic downturn in 4Q15 as contracted 1.7% yoy, bringing full year SSSG to 0.7% yoy.
2. New stores underpinned growth. 6 new stores opened in 2014 and 2015: Penjuru (Dec-14), Tampines Blk 506 (Jan-15), Punggol (May-15), Bukit Panjang (May-15), Pasir Ris (Jun-15) and Dawson Road (Dec-15). New stores’ 4.6pp contribution was offset by rising competitive pressure in vicinity.

New retail areas in the pipeline
1. Yishun Junction 9 is expected to open in 2Q16, one year earlier than expected. 10.5k sqft for supermarket operation and remaining 8.1k sqft for leasing operation (pending approval).
2. Tampines Blk 506 is expected to reopen in Jan-17 (after being closed for renovation in 4Q16) with additional 15k sqft (total 25k sqft).
3. Loyang Point Blk 258 is expected to reopen in 1Q17 (after being closed for renovation in 2Q16 for renovation) with additional 2k sqft (total 8k sqft).
4. Circuit Road with smaller retail area of 3.5k sqft, is waiting for HDB to grant and execute the lease.
Additional 31k sqft retail space, or 7% increase in total retail area in the next 2 years
1. Gestation of new stores. While Tampines Blk 506 and Loyang Point Blk 258 (combined contribution of 4.6% FY15 revenue in aggregate) are closed for A&E works, new retail area opened last year should gain traction to mature businesses.
2. Rejuvenate sluggish 2012 old stores. Renovation temporarily impeded turnover but has long tail benefits – renovated store tends to behave like a new store, enhancing SSSG.

Actual FY15 EBITDA was slightly higher to our estimation due to unexpected net tax refund and higher other income.
Gross profit margin edged up by 0.5pp to 24.7% in FY15, and reached 25% in 4Q15, which is in-line with management guidance, but vulnerable to competition pressure. Product mix also improved slightly – groceries to fresh products ratio logged at 59:41 – more gap to fill before hitting the ideal 50-50 (higher margin product mix).

Remains zero debt with healthy cash position at S$125.9 mn as at end FY15.
Positive operating cash flow generation, free cash flow averaged at S$109.s mn in FY13-15, 90% dividend payout ratio is sustainable.
We are optimistic that SSG’s three new large stores by end-FY17, which are also rare to come by, could enhance its position to capture market share.

FY16E earnings is revised higher on early launch of Yishun Junction 9 and improved margin, which will be partially offset by the two stores closures for renovation.
We maintain Accumulate rating with a slightly higher TP at S$0.97 (from previous TP at S$0.96), based on higher estimated 4.20 cents FY16 EPS and a lower PER ratio of 23x.
We lowered the PER ratio from 25x to reflect the shift of 3-year average historical PER.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-02-25

Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 0.97 Up 0.96