Sheng Siong - RHB Invest 2016-04-28: Further Margin Improvements

Sheng Siong - RHB Invest 2016-04-28: Further Margin Improvements SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong - Further Margin Improvements

  • Operating margin improvements this quarter validate our belief that there is further room to grow in this aspect; Sheng Siong’s balance sheet remains strong even after exercising its options recently to purchase existing premises at Bedok for SGD53m. 
  • We expect a moderate increase in retail area for 2016, with the opening of four outlets in 2Q16, despite some store closures for renovation. 
  • Maintain BUY.

Same-store sales growth (SSSG) decline moderated QoQ. 

  • Sheng Siong posted a strong set of 1Q16 results. SSSG was -0.5%, which is a sequential improvement from the surprising -1.7% in 4Q15. 
  • The negative SSSG is a combination of weaker spending as well as several store-specific reasons. However, we believe this improvement is a positive signal that consumption spending at Sheng Siong remains defensive in nature.

Gross margins were maintained at 24.5% vs 1Q15. 

  • This is in line with our expectations of a marginal improvement in 2016. 
  • First quarter margins are seasonally lower, due to more bulk purchases during the Chinese New Year festive season.

Operating margins continue to improve. 

  • Operating margins improved 80bps to 9.3% in 1Q16, reflecting continued cost control excellence. 
  • This was also partly due to higher other income, reflecting government grants to offset labour cost pressures.

Maintain BUY. 

  • We keep our estimates unchanged, and maintain BUY, with a DCF-derived TP of SGD1.00. 
  • The risk to our call is the inability to find new store locations going forward, which is likely to reduce growth potential.

James Koh RHB Invest | http://www.rhbinvest.com.sg/ 2016-04-28
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.00 Same 1.00