Sheng Siong Group - OCBC Investment 2017-02-24: Steady Margin

Sheng Siong Group - OCBC Investment 2017-02-24: Steady Margin SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Steady Margin

  • FY16 PATMI up 10.3%.
  • Factors remain supportive for margins.
  • Strength in cost control to help.

FY16 met our expectations 

  • Sheng Siong Group’s FY16 results met our expectations, with FY16 revenue up 4.2% to S$796.7m and PATMI was 10.3% higher at S$62.7m, both meeting 100% of our FY16F estimates. 
  • Revenue for the year was driven by new stores growth of 6.2% and 0.2% comparable same store sales growth (SSSG), but offset by a contraction of 2.2% from the temporary closure of the Loyang store (re-opened in Feb-17). 
  • In 4Q, revenue grew 5.3% YoY to S$197m and PATMI was up 5.3% to S$15.4m.
  • New stores revenue growth was 8% in 4Q, as it included a full quarter contribution from the new YJ9 store (15k sq ft) that opened in Sep-16.

Stable gross profit margin expected 

  • Notably, gross profit margin (GPM) improved to 26.3% in 4Q, with overall GPM at 25.7% for FY16 (vs. 24.7% in FY15). Notwithstanding seasonality effects, we see sustainability in margins, underpinned by the following factors: 
    1. rebates from suppliers given for special promotions, volume, display and bulk handling services, 
    2. some room for more bulk handling, 
    3. increasing fresh sales (currently contributes 42% of sales).

Closing underperforming stores 

  • The closure of Verge and Woodlands Checkpoint supermarkets has been pushed back by 1-2 months to 31 May and 31 Aug 17, respectively. These two stores contributed 8.6% to FY16 revenue, but have been underperformers among the portfolio of stores. 
  • The bidding environment for new stores has been competitive but opportunities remain and management has been staying prudent in their choices. 

Keeping our buy rating 

  • Against a competitive backdrop, growth ahead will continue to be driven by their nine new stores. Any planned refurbishment of older stores has historically translated to better revenue performance after completion.
  • The Block 506 Tampines store will continue to operate amid improvement works to expand its retail area by 15k sq ft to ~25k sq ft by 2Q17. The group’s first store in China is also slated to open by the end of 3Q16.
  • Meanwhile, we believe in management’s strength in cost control to maintain core profitability. We keep our BUY with an unchanged FV estimate of S$1.15. 
  • A higher final DPS of 1.85 S-cents was declared, bringing total DPS to 3.75 S-cents, vs. 3.5 S-cents last year.

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2017-02-24
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.150 Same 1.150