Sheng Siong - RHB Invest 2016-10-27: Margin Expansion To Continue

Sheng Siong - RHB Invest 2016-10-27: Margin Expansion To Continue SHENG SIONG GROUP LTD OV8.SI

Sheng Siong - Margin Expansion To Continue

  • We continue to like Sheng Siong’s defensive nature and its ability to deliver growth despite softening demand. 
  • Moving forward, we expect gross margin to continue expanding with more bulk handling services, increase sales mix in fresh produce and low input prices. 
  • Maintain BUY with a higher TP of SGD1.21 (from SGD1.12, 13% upside).

Profit growth to be led by margins expansion. 

  • We expect EPS to grow at c.9% CAGR over FY15-18F as we think Sheng Siong’s gross margins will continue to expand despite tepid demand. This is on the back of higher suppliers’ rebates from increase bulk handling services. 
  • Currently, one out of four storeys of its distribution centre (DC) has yet to be fully utilised and Sheng Siong plans to increase the size of its DC by c.45,000 sq ft by FY18F.

Dividend payout intact. 

  • The company has committed to 90% payout ratio up to FY16F. 
  • CFO, Mr Wong cited that Sheng Siong is a cash generative business and does not have any debt at the moment. Hence, barring any new property purchases, we have assumed that the company is able to maintain its dividend payout policy.

Newly opened stores to support top line. 

  • Consumer demand remains weak in Singapore. As a result, we expect muted SSSG in FY17-18F. 
  • Revenue growth will be driven by the ramping up of newly opened stores (opened within the last 2 years), and future store growth. HDB has 7 new units dedicated for supermarkets up for bidding in the next 6 months. 
  • We estimate Sheng Siong to open 3-4 new stores p.a for FY17F and FY18F.

Maintain BUY with TP SGD1.21. 

  • We kept our forecasts largely unchanged and rolled over our DCF assumptions to FY17F. This raised our TP to SGD1.21, implying 13% upside and 16.8% total return. 
  • Key downside risks include its inability to open new stores, high capex if the company purchases new property to expand and erosion of margins if competition intensifies.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.21 Up 1.120