Sheng Siong Group - CIMB Research 2017-02-26: 4Q16 Unexciting outlook, Take profit

Sheng Siong Group - CIMB Research 2017-02-26: 4Q16 Unexciting outlook; Take profit SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - 4Q16 Unexciting outlook; Take profit

  • 4Q16 net profit (S$15.4m, +5.7% yoy) was in line with expectations. We deem FY16 core net profit broadly in line, at 98% of our forecast.
  • However, we now expect investor focus to turn to: 1) the lack of new stores, and 2) muted same-store sales growth.
  • Sheng Siong is on the verge of losing two big stores this year (which formed total 8.6% of FY16 sales). We think the company will struggle to plug these big holes.
  • We also foresee risk to the group’s other income line, which was at an unsustainably high level in FY16 and lifted group earnings for the year.
  • We cut FY17-18F EPS by 5-17% for lower sales assumptions. Downgrade to Hold.

4Q16 earnings in line 

  • Sheng Siong reported a steady set of 4Q16 results, with core net profit in line with our and Bloomberg consensus expectations. 4Q16 net profit rose by a respectable 5.7% yoy on the back of 5.3% sales growth. 
  • Positives were continued gross margin improvement (4Q16: 26.3%, 4Q15: 25.0%, 3Q16: 25.9%), driven by supplier rebates, continued bulk handling services and higher mix of fresh produce. 
  • We think the impressive 4Q16 gross margin is sustainable. 
  • Operationally, the company is doing well and margins are high.

Lack of sales drivers 

  • Our grouse is sales, as we are troubled by: 
    1. the lack of new stores, 
    2. lacklustre environment, which contributed to muted same-store sales growth in 4Q16, and 
    3. store closures.

No new store announcements since 2H16 

  • Sheng Siong opened four new stores in FY16, adding c.25k sq ft of space (or c.6% to GFA). These new stores were key to the group’s 4.2% sales growth in FY16, made up by new stores (+6.2%), same-store sales growth (+0.2%) and store closures (-2.2%). However, the group has not announced any new stores since 2H16. 
  • Moreover, competition for retail space remains heightened and bidding is tough as smaller supermarket operators have been aggressively bidding up rents at new HDB shops.

Flat same-store sales growth expected for FY17F 

  • Retail sales have generally been weak and are not expected to improve in significantly this year, especially as the Singapore economy is only expected to expand by 1-2% in 2017. 
  • Management sounded lukewarm on the retail environment and expects lacklustre demand this year. Accordingly, both 4Q16 and FY16 same-store sales growth was muted at +0.2% yoy. 
  • The cost-conscious consumption environment poses further risk to the group’s ability to pass on any cost increases.

Store closures are likely to cause sales decline in 1Q18F onwards 

  • Sheng Siong is on the verge of losing two big stores in FY17F: 
    1. the Verge (c.45k sq ft, due for closure in May), and 
    2. Woodlands Checkpoint (c.40k sq ft, Aug closure). 
  • These are not the group’s best-performing stores but they still contributed a significant combined 8.6% of FY16 sales. The closures, coupled with the lack of new stores, lead us to think that group sales will start to decline in 1Q18F.

Downgrade from Add to Hold; stock fully valued 

  • We cut FY17-18F EPS by 5-17% as we update our sales and store growth assumptions. Accordingly, our target price falls to S$0.94, still based on 23.3x CY18 P/E (3-year historical mean). 
  • Downgrade from Add to Hold. 
  • Upside/downside risks include new store wins/margin compression.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-02-26
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.94 Down 1.140