Sheng Siong Group - DBS Research 2016-07-27: More efficient operations

Sheng Siong Group - DBS Research 2016-07-27: More efficient operations SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - More efficient operations

  • 2Q16 results in line, driven by higher margins.
  • Interim dividend of 1.9 Scts declared.
  • Raise FY16-17F earnings marginally by 1-3%.
  • Maintain BUY, S$1.09 TP.



Maintain BUY, operating more efficiently. 

  • We continue to like Sheng Siong as the company continues to meet growth expectations through better operating efficiencies; gross margins expanded and sales metrics improved. 
  • Earnings remain on track to meet our forecasts. There is no change to its dividend payout of 90%, and the stock offers a yield of 4.2%, based on our DPS estimate of 4.05 Scts for FY17F. 
  • Expansion is also on the cards as its first China store is set to open in 4Q16, while the warehouse in Mandai will expand, which will help the company to grow its store network in Singapore.


2Q16 earnings in line. 

  • Earnings of S$15.2m (+11% y-o-y) met our expectations. 
  • While revenue growth disappointed our more aggressive revenue estimates, earnings more than made up for this through better gross margins, and sales per square feet. 
  • Gross margin is at an all time high of 26% due to better bulk handling, supplier rebates and sales mix). Sales on an annualised per square foot basis, is also at a new high for 2Q at S$1,752.


Raise FY16-17F earnings slightly. 

  • The expected opening of the 40,000 sqft store in Kunming, China, will offset revenue to some extent the closure of a similar sized store in Woodlands in 2Q17. 
  • We have raised our FY16-17F earnings by 1-3% respectively to reflect the better margin outlook from better supplier rebates, and more bulk activities.


Valuation:

  • Our target price for Sheng Siong is S$1.09 based on 25x FY17F PE. The valuation is pegged at below +1SD of its historical mean and below regional peers' average of 27x PE.


Key Risks to Our View:

  • Store openings, price competition. Revenue growth will be led by new store openings. Excessive discounts and promotions in the market by competitors will ultimately result in lower margin.




Alfie Yeo DBS Vickers | Andy SimCFA DBS Vickers | http://www.dbsvickers.com/ 2016-07-27
DBS Vickers SGX Stock Analyst Report BUY MAINTAIN BUY 1.09 Up 1.04


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