Sheng Siong - RHB Invest 2016-02-24: Defensive Business To Hold Up Well

Sheng Siong - RHB Invest 2016-02-24: Defensive Business To Hold Up Well  SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong - Defensive Business To Hold Up Well 

  • Despite SSSG taking a slight turn for the worse in 4Q15, we believe the defensive nature of Sheng Siong’s sales are likely to hold up well in 2016 against a backdrop of weak spending in Singapore. 
  • This environment may provide the catalyst for its next leg of growth as the firm is well placed to secure favourable long-term rental locations/ rates. 
  • FY15 dividend payouts totalled 3.5 cents/share (FY14: 3 cents/share), which is comfortably sustainable going forward. 
  • Maintain BUY with a DCF-based SGD1.00 TP (from SGD1.05, 15% upside). 

Profit growth to come from further margins expansion in 2016. 

  • We expect demand conditions to remain tepid in 2016, lending to weak same-store sales growth (SSSG). However, Sheng Siong’s profitability is likely to be driven by further improvements in operating margins. 
  • The opening and subsequent expansion of self-owned stores in Tampines and Yishun this year may also provide upside to earnings. 

SSSG hit negative in 4Q15. 

  • Sheng Siong’s SSSG declined by 1.7% in 4Q15 due to tepid demand. We expect management to rejuvenate its older stores progressively over the next few years to improve sales momentum. 
  • We believe sales would remain relatively stable due to defensive nature of its business. 

Further room to improve margins. 

  • We believe further room to improve margins is likely to come from: 
    1. continued strength of the SGD vs the MYR (where the group sources its food), 
    2. increased bulk handling, and 
    3. the rollout of self-checkout machines to alleviate manpower cost pressures. 

Reiterate BUY. 

  • We trim FY16F-17F earnings by 4-8%, to account for more muted demand within older stores. 
  • We reiterate BUY on this stock with a DCF-derived SGD1.00 TP (previously SGD1.05), implying 25x FY16F.

James Koh RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-24
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.00 Down 1.05