Sheng Siong Group - DBS Research 2016-10-27: Earnings growth continues

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Earnings growth continues

3Q16 results in line driven by new stores and margin expansion.
For two quarters in a row (2Q16-3Q16), gross margin has hit 26%, an all time high.
Expect gross margins to expand over the coming quarters.
Maintain BUY with S$1.19 TP.

We maintain our BUY recommendation on Sheng Siong as 3Q16 results continued to show earnings growth momentum.
We like Sheng Siong for its earnings growth traction, efficient operations, strong ROE, and net cash balance sheet.
We had previously taken a view that gross margin of 26% that was reported in 2Q16 would be sustainable. This was validated in the current set of results. Earnings have proved to be resilient despite a difficult operating environment.
We continue to favour the stock for its defensive earnings qualities and dividend yield of c.4%. Maintain BUY for 15% upside including dividends.

Sheng Siong turned in a decent set of results.
Gross margins had expanded over last year, while sales were driven by new stores.
Same store sales growth (SSSG) was negative y-o-y largely due to the renovation at its Loyang store. SSSG would have been positive had the Loyang store been in operation.
Growth was also achieved against a challenging macro environment where Singapore retail sales for supermarkets have been sluggish and sales during the festive Chinese Seventh Month was not as robust.
We see gross margins sustaining at 26% in the following quarters through direct sourcing of fresh products especially vegetables from farms regionally, house brands, more bulk purchasing and higher mix of fresh food. We hence expect gross margins to expand on a y-o-y basis in the next two quarters.

Our target price for Sheng Siong is S$1.19 based on 25x FY17F PE.
The valuation is pegged at +1SD of its historical mean since listing and below regional peers' average of 27x PE.

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 margins.

Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-27

DBS Vickers SGX Stock Analyst Report BUY Initiate BUY 1.19 Same 1.180