Sheng Siong Group - OCBC Investment 2016-11-29: A Defensive Business

Sheng Siong Group - OCBC Investment 2016-11-29: A Defensive Business SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - A Defensive Business

  • Competition set to increase.
  • Value positioning in the market.
  • Strong management execution.

Still growing despite keen competition 

  • Amid challenging operating conditions, Sheng Siong Group has been a consistent performer with revenue having been driven by its nine new stores that were opened since 2015, while same store sales growth would have been better if not for a temporary store closure. 
  • Looking ahead, we are cognizant of the looming store closures next year for a Woodlands store and very likely, the one in The Verge mall. 
  • Nonetheless, revenue can continue to be underpinned by new stores and renovation of older stores can typically boost growth as well. 
  • Next year, the store at Loyang Point that was temporarily closed since Apr may re-open in 1Q17, and the store at Block 506 Tampines Central would be closed in Mar-17 for two months and would re-open with additional ~15k sq ft of space. We would not be concerned with new stores that are of smaller sizes, as these are in untapped areas and are able to enjoy healthy traffic. 
  • In addition, although the local supermarket industry has been facing rising competition from existing and new entrants in both traditional and e-commerce fields, we believe the group’s value positioning in the market cushions against such adversity.

Sustainable margins 

  • The group has also been able to improve its margins steadily over the past few years and margins are likely to sustain on the back of on- going initiatives which include increasing direct sourcing and bulk handling, improving its sales mix (higher proportion of fresh produce), as well as increasing selection and types of house-brand products. Due to a variable staff cost structure, the group can control costs through improving efficiency as well as reducing overheads. 
  • Separately, on the group’s plans to open its first store in Kunming, China, this is expected to be delayed to 2Q17, while we do not expect gestation losses to be significant. 
  • All considered, with a defensive and cash generative business, a healthy balance sheet and net cash of S$46m as of 30 Sep-16, we have a BUY on the stock with fair value estimate of S$1.15.

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2016-11-29
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.150 Same 1.150