Sheng Siong - RHB Invest 2017-05-02: Looking Ahead

Sheng Siong - RHB Invest 2017-05-02: Looking Ahead SHENG SIONG GROUP LTD OV8.SI

Sheng Siong - Looking Ahead

  • We maintain our BUY recommendation and DCF-derived TP of SGD1.21 (24% upside) on Sheng Siong. 
  • New store openings remain the key catalyst for its stock price, in our view. Short of any new stores, the company is still expected to increase its total retail space from the expansion of its Tampines outlet and the reopening of the Loyang store.

Gross margin expansion drivers to change. 

  • Moving forward, we believe gross margins could still improve from an increase in the sale of fresh products. This is as bulk handling reaches its maximum potential.
  • According to management, the percentage of sales contributed by fresh produce has grown to about 43% in 1Q17 (4Q14: 40%). We note that fresh produce generates higher gross margins and would be the key driver for Sheng Siong’s margin expansion in the future.

Outlook for revenue growth. 

  • This year, we expect the company’s sales growth to be driven by the four supermarkets it opened in 2016. 
  • We also see the expansion of the Tampines outlet (+15,000 sq ft) and reopening of the Loyang store (+7,000 sq ft) as drivers as well.

New stores to be the key catalyst. 

  • At the moment, we have not factored in new store openings for 2017. However, we note that competition for the leasing of Housing and Development Board (HDB) sites have eased. Rental rates have fallen to SGD13-15/sq ft in 1Q17. By comparison, it stood at SGD18-20/sq ft in 4Q16.
  • Over the next six months, the HDB has six new sites designated for supermarkets to bid. The challenging retail environment has also freed up more commercial sites in the private leasing space.
  • As such, we believe the environment is now more conducive for Sheng Siong to bid for new stores.

Maintain BUY and DCF-derived TP of SGD1.21. 

  • We kept our forecast and recommendation unchanged. We believe Sheng Siong is a well-run company. Its variable compensation scheme allows it to maintain its margins in the tepid growth environment. 
  • Any new store opening would be the key catalyst for its stock price, in our view.
  • Risks to our call are high capex if Sheng Siong expands via the purchasing of retail stores, the inability to find affordable areas to lease, and a price war from competitors.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-05-02
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.210 Same 1.210