Sheng Siong Group - CIMB Research 2016-12-05: Stable earnings in challenging times

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Stable earnings in challenging times

New stores have been contributing positively to sales growth in FY16. Expect more of the same in FY17.
The company continues to make stellar gross margin improvements. Gross margins are now at record-high levels and we are confident they are sustainable.
Maintain Add with a TP of S$1.14. The stock offers attractive yields of c.4%.

In 2014, Sheng Siong saw ~20% earnings growth even without new stores as it turned its stores into 24-hour stores and reaped efficiency gains from its central distribution centre. But 2015 was a bumper year for new stores and this has been fuelling growth in 2016.
We are hopeful the group will be able to continue to secure more stores next year as it stands to benefit from a greater supply of housing blocks coming on stream.

A feature showing up in recent quarters has been the negative same store sales growth (-1.15% yoy in 3Q16). We think this is a reflection of the general pullback in discretionary consumption trends and the broader weak macro. The silver lining is that this is less an idiosyncratic problem and more an industry-wide phenomenon.

On the bright side, gross margins continue to beat expectations and we see the 25- 26% level as sustainable. The group’s record gross margins are being driven by higher supplier rebates (given for volume, display and bulk handling), sales mix (higher proportion of fresh vs. dry), and direct purchasing initiatives.

There have been investor concerns over management’s plans to enter China which could possibly burn a capital hole. We understand the concerns given Sheng Siong’s lack of experience beyond Singapore and the intense competition in China’s supermarket space. However, management has assured us that it will be cautious.
Further, with the investment in China capped at S$6m, we think risks are tilted to the upside. The latest guidance is for its c.54k sf store in Kunming to open in 2Q17.

Sheng Siong has a strong FCF business model that supports a 4% dividend yield. It also has a track record of seeing store growth in spurts, especially during market downturns.
2017 could be one of these growth spurt years. Coupled with its net cash position, we think the stock’s premium valuations reflect stable earnings and attractive yields in tough times.
Our TP of S$1.14 is pegged at 23.3x CY18 P/E (3-yr historical mean).
Risks to our view include a drop in margins or unexpected store closures.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2016-12-05

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