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.

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.

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.

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.

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.

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.

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