Sheng Siong Group - Maybank Kim Eng 2016-07-26: Counter-cyclical Consumer Buy

Sheng Siong Group - Maybank Kim Eng 2016-07-26:  Counter-cyclical Consumer Buy  SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group (SSG SP) - Counter-cyclical Consumer Buy


Our top consumer pick. Forecasts, TP raised

  • 2Q16 results reinforce why we like Sheng Siong as a counter-cyclical play. 
  • As the economy weakens, we expect it to benefit from consumers trading down. 
  • Benign competition also means it should be able to pass on food inflation, boosting SSSG, with no impact on margins. 
  • Even at 20x PER, we think Sheng Siong is not expensive given its > 4% yield and superior returns. 
  • Maintain BUY and street-high TP of SGD1.13 (raised from SGD1.12) based on a blended DCF (WACC 7.2%, LTG 1.5%) and equivalent to 22x FY17 P/E.


2Q in line; bucks the weak environment

  • Overall, 2Q was in line but there is cause to be even more optimistic. 
    • One, sales rose 5.5%, above 1Q’s 5%, and would have risen 8.2% if the Loyang store had not closed for renovations. 
    • Two, new store sales (+6%) rose for the third consecutive quarter and should do well in 3Q again. As expected, SSS turned around to 2.2% from 1Q’s 0.5% contraction on a recovery in older stores. 
    • Three, gross margin of 26.2% beat and we raise our above-consensus earnings forecasts by 1% for FY16-17.


Resilient with growth catalysts

  • Despite the weak economy, rising food prices and consumer trading down (ie switch from more expensive supermarkets such as Cold Storage) mean Sheng Siong’s SSSG should be sustainable. 
  • We expect Sheng Siong to be able to pass on higher prices of fresh produce, which accounts for c.40% of sales. 
  • We also expect upside to average annual margins of 26% over the next three years on more higher-margin fresh produce and rollout of more productivity measures, such as hybrid payment terminals.


More expansion headroom with HDB

  • The pipeline of HDB sites reserved for supermarkets is expected to rise from seven this year to 13 in 2017, which will give Sheng Siong more opportunities to bid for more stores. 
  • We are positive on new stores due to their higher sales growth potential compared to the old stores. 
  • Historically, new store sales have risen as high as 16% in certain quarters vs peak old-store growth of only 5%.


Swing Factors


Upside

  • Higher-than-expected revenue growth on the back of rising food inflation.
  • Better-than-expected food cost savings or lower labour costs following greater automation.
  • Won more-than-expected tenders for public housing sites for new supermarkets.

Downside

  • China supermarket venture does not take off as successfully as expected
  • Inability to pass on higher food costs due to increased competition.




Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-26
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.13 Up 1.12


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