Sheng Siong Group - Phillip Securities 2016-07-28: In a sweet spot

Sheng Siong Group - Phillip Securities 2016-07-28: In a sweet spot SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - In a sweet spot

  • New stores propelled revenue, mature stores turned around.
  • Results are in line with our expectation.
  • May seek debt to fund higher CAPEX.
  • Maintain Accumulate rating with higher TP at S$1.10 (previously S$0.97).

Drags from McNair and Woodlands stores alleviated, SSSG recovers. 

  • McNair store was closed for a month in 2Q15 for total refurbishment. Excluding McNair store’s contribution, SSSG (comparable same store sales growth) would have been 1.3%. 
  • Meanwhile, Woodlands store rebounded as effects from weaker ringgit and restriction on the sale of liquor (which took effect in 2Q15) diminished. 
  • Overall, we think that SSSG have turnaround. The ongoing rejuvenation of old stores should support SSSG and offset the effect from Loyang store’s temporary closure somewhat.

Unsuccessful application for change of use and slight delay in Yishun Junction 9 opening. 

  • Three new stores opened and the temporary closure of Loyang Point brought store count to 41 and total retail area of 434,800 sqft. as at 30 June 2016. Yishun Junction 9 is currently undergoing renovation and should open in August 2016. The nine new stores (5 in 2015, 3 in 2Q16 and 1 in 3Q16) should underpin topline growth.

Highest gross margin recorded since listing, but expects to average to ~25% for FY16. 

  • Gross margin hit record high at 26.1% due to 
    1. suppliers’ rebates; and 
    2. reduction in input costs derived mainly from bulk handling. 
  • Against a lackluster retail environment, the Group should continue to benefit from lower input prices in a buyers’ market. However, competitive pricing in the 3Q16 arising from the Hungry Ghost Festival should compress gross margin, bringing it to a more sustainable level at c.25% for the year. 
  • Catalyst for higher margin will be an improvement of product mix, i.e. more fresh products compared to groceries (current ratio at 41: 59).

Cost is less of a worry now, but may resort to borrowing in view of higher CAPEX

  • The Group enjoys a net savings of S$2mn from the recently purchased Bedok store (c.S$3mn annual rental will be converted to depreciation costs of c.S$0.7mn). With Singapore’s tight labour market easing slightly, softer rental reversion, and subdued inflation outlook, we expect operating cost pressures to remain contained. Administrative expenses were 16.8% of 2Q16 revenue vs 16.4% in FY15.
  • However, payments for two big ticket items have slashed the Group’s net cash position by more than half. After the purchase of Bedok store and progress payments for Yishun Junction 9 totaling S$74.4m, as well as other renovation and maintenance CAPEX totaling S$6.9mn, its war chest stood at S$50.8mn as at 30 June 2016.
  • Notwithstanding its continuous effort to open new stores and rejuvenate old stores, with the additional construction cost for the new building at its central warehouse (estimated to be c.S$20mn), the Group may need to resort to debt in order to fund its CAPEX. And the low interest rate environment would be favourable time now.

Another speed bump for its China maiden store. 

  • The Group shared that it now expects construction to start in Aug 2016 instead of July. In view of the Chinese bureaucracy, the expected date of opening may be delayed into 2017 instead of 4Q16.

Maintain Accumulate rating with higher TP at S$1.10, pegged to an upgraded estimated 4.79 cents FY17 EPS and unchanged 23x PE multiple. 

  • We upgraded FY17F EPS by c.2% after amending our FY16-17 expectations to account for delayed closure of Tampines Central (to 1Q17 instead of 4Q16) and higher CAPEX but moderate cost pressures. 
  • The nine new stores (including the upcoming Yishun Junction 9) should drive growth in FY16-17. 
  • The recovery of mature stores should partially mitigate the impact of downtime of its two big stores (Loyang Point and Tampines Central). 
  • Meanwhile, the Group is seeking new stores to replace the loss of 41,500 sqft Woodlands store (to be closed in June 2017).

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-07-28
Phillip Securities SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 1.10 Up 0.97