Sheng Siong Group - CIMB Research 2016-07-27: Buzzword during 2Q16's analyst briefing: sustainability

Sheng Siong Group - CIMB Research 2016-07-27: Buzzword during 2Q16's analyst briefing: sustainability SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - Buzzword during 2Q16’s analyst briefing: sustainability

  • Hot topics were the sustainability of 
    1. record-high gross margins, and 
    2. dividends on the back of higher capex; 
    we are comfortable on both fronts.
  • Retail environment still subdued, but same-store-sales-growth (SSSG) is now positive, and Sheng Siong benefits from its positioning for the masses.
  • We maintain our Add rating; we prefer Sheng Siong over Dairy Farm.

2Q’s gross margins are near peak levels, in our view

  • Management provided more colour on the drivers behind 2Q16’s record-high GPM of 26.1% (2Q15: 25.2%). Rebates from suppliers was the primary reason, which management attributed to today’s weak macro environment, making it a buyer’s market. Other factors which played a part included lower input costs from bulk handling and a better sales mix (fresh/dry now at 41/59 vs. 40/60 previously).
  • Going forward, management believes 3Q GPM is likely to be sequentially lower due to seasonality, with retailers pushing for greater volume during the Lunar Seventh Month. 4Q GPM should revert to near 2Q’s levels.
  • Management’s tone sounded conservative, and guidance is for FY16 gross margins to be in the 25.0-25.5% range. This is in line with 1H16’s GPM of 25.3%. We think results could exceed our current FY16F GPM assumption of 25.0%.

No threat to dividends

  • The second concern management addressed was the sustainability of dividends on the back of higher capex. 1H16’s capex was on the high side at S$81m, and included the purchase of the Bedok store (S$55m) and progressive payments for Yishun J9 (S$19m). The only major remaining capex is S$20m for the expansion of its central warehouse, which will be incurred over FY17.
  • With operating cash flows of c.S$70m p.a. and net cash of S$51m (as of end-2Q16), we see no threat to dividends. 1H16’s declared interim dividend of 1.90 Scts translates to a 90% payout.

Overall retail environment still weak

  • On the overall retail landscape, demand remains tepid and food inflation is subdued. Management shared that some competitors have rationalised stores, which helped to contribute to the group’s core SSSG of +1.3% this quarter. We suspect Sheng Siong is currently benefitting from its focus on the masses/budget segment.
  • The knock-on effect of a weak retail environment is lesser competition for new stores and opportunities to take over competitors’ stores. However, management assured us that it will not overbid for stores, and rents remain a key internal target.

Maintain Add

  • We maintain our Add rating and target price of S$1.04. We prefer Sheng Siong over Dairy Farm (DFI SP, Hold).

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-27
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.04 Same 1.04