Sheng Siong Group - DBS Research 2017-02-24: Stronger margins to drive growth

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SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Stronger margins to drive growth

• 4Q16 results in line, growth led by new stores.
• Final DPS of 1.85 Scts declared.
• Gross margins at record high, expect continued margin expansion in FY17F.
• Maintain BUY, TP S$1.13.

Maintain BUY, TP S$1.13 on more positive signs on margin direction. 

• We remain positive on Sheng Siong as we see higher margins continuing to drive earnings growth in FY17F. 
• We believe gross margins should be able to sustain at 26% in FY17F, higher than FY16’s 25.7%. 
• Gross margins for the past three quarters have proven to be sustainable at 26%, even over the seventh month festive period in 3Q16 when price promotions and discounts to drive volumes typically pull down margins. We expect this run rate to flow through into FY17F leading to comparatively higher gross margins. 
• We have already factored in imminent store closures that have resulted in muted revenue growth projections. Yet due to better margins, we expect earnings growth to continue outpacing topline growth.
• The stock trades at an attractive 21.2x FY17F PE, 4% dividend yield, and offers an attractive ROE of above 25%. Our TP of S$1.13 offers a return of 18%.

4Q16 in line. 

• 4Q16 results were largely within expectations.
• Revenue was slightly below our expectations but earnings was made up by record high gross margins of 26.3%. 
• Revenue growth was driven mainly by new stores which grew by 8%, supported by same store sales growth (SSSG) of 0.2%, offset by decline in the Loyang store due to absence of contribution from renovation exercise. Including the Loyang store, SSSG would have declined by 2.7%. 
• Higher gross margins were achieved by more bulk handling and supplier rebates. 
• Sheng Siong declared a final dividend of 1.85 Scts equivalent to a 90% payout ratio for the full year.

Valuation

• Our target price for Sheng Siong is S$1.13 based on 25x FY17F PE. The valuation is pegged at +1SD of its historical mean since listing and below regional peers' average of 27x PE.

Key Risks to Our View

• Store openings, price competition. Revenue growth will be led by new store openings. 
• Excessive discounts and promotions in the market by competitors will ultimately result in lower margins.

Alfie YEO DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2017-02-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.130 Down 1.190