Sheng Siong - RHB Invest 2016-07-27: Up The Defensive Play

Sheng Siong - RHB Invest 2016-07-27: Up The Defensive Play SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong - Up The Defensive Play

  • We continue to like Sheng Siong for its defensive nature. Reiterate BUY with a higher SGD1.12 TP (from SGD1.00, 17% upside). 
  • Same-store sales growth (SSSG) turned positive in 2Q16 after two quarters of negative growth. Operating margins also continue to improve. 
  • As the weakness in the local economy persists, we believe there will be more opportunities for the company to shore up its store count at affordable rental rates.

More opportunities to open new stores. 

  • Due to the exit or downsizing of retailers in this challenging operating environment, there are more opportunities for Sheng Siong to take up vacant spaces at the older residential areas. 
  • In addition, our check of the Housing and Development Board (HDB) website shows that there are five new commercial units pending completion within the next six months that will be open for supermarket tenders. Hence, we are now more optimistic on its ability to open new stores in the near term. 
  • The group opened three outlets in 2Q16, with one more outlet at Yishun Junction 9 expected to commence operations in 3Q16. 
  • We expect Sheng Siong to open at least five stores by the end of this year.

Reiterate BUY with a higher TP SGD1.12. 

  • We increase our earnings forecasts by 4-7% for FY16-18 due to:
    1. A brighter outlook for store expansions; 
    2. Improving gross margins.
    3. As such, we also raise our DCF-derived TP by 12% to SGD1.12 (17% upside), implying 24.5x FY17F P/E.

Superlative gross margin in 2Q16. 

  • Sheng Siong’s 2Q16 gross margin of 26.1% exceeded our previous forecast of 24.5%. 
  • We note that most of the growth in gross margin was due to one-off rebates by suppliers. However, with increased bulk purchases and cost controls in place, we also raise our FY16 gross margin forecast to 25%. 
  • This report also marks the transfer of coverage to analyst Juliana Cai.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.12 Up 1.00