Sheng Siong Group - CIMB Research 2017-07-28: Safe For Now, But Amazon Could Shake Things Up

Sheng Siong Group - CIMB Research 2017-07-28: Safe For Now, But Amazon Could Shake Things Up SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Safe For Now, But Amazon Could Shake Things Up

  • Sheng Siong Group's 2Q17 net profit (S$16.1m, +6.3% yoy) was in line, forming 24% of our FY17F.
  • Some signs of improved consumer sentiment as core SSSG was a decent +1.7% yoy, but still too early to say with certainty. We see threats from new online players.
  • At 24x CY18F P/E, we do not think current valuations are attractive. Maintain Hold.

Results held up as expected, 2Q17 threw up little surprises. 

  • 2Q net profit (S$16.1m, +6.3% yoy) was in line with our expectation, with the improved profitability mostly driven by better sales. Key things to note: 
    1. sales growth was still dependent on new stores but same-store-sales-growth (SSSG) showed signs of improvement, 
    2. incredibly, gross margins continued to climb, 
    3. it won two new stores, 
    4. lower 1H17 DPS of 1.55 Scts (1H16 DPS: 1.90 Scts).
  • Key things to keep an eye on going forward: 
    1. momentum of new store wins, which is important to compensate for store closures, 
    2. China store opening in Sep 17, 
    3. impact of heightened competition from ecommerce on its margins.

Initial signs of improved consumer sentiment

  • Our grouse about sales was a lacklustre consumption environment translating into flat SSSG. However, 2Q showed some signs of recovery. If we exclude stores which were partially closed or about to be closed to get a gauge on the core underlying consumer sentiment, we are comforted by the relatively strong +1.7% SSSG in 2Q. This is above our expectation of 0-1% SSSG.
  • That said, the main driver for sales growth was still new stores opened in 2016 (+5.2% yoy). This is all good for now, but might be a concern in FY18F as these stores would be more mature by then. Therefore, we are concerned about 1H18 as sales would be hit by 
    1. maturation of stores opened in 2016, and 
    2. impact of store closures (Verge in Jun 17 and Woodlands in Oct 17). 
  • Sheng Siong will need to win more new stores, else we think there will be a yoy sales decline in 1H18F.

Record-high gross margin (26.6%) surprised us positively

  • The big positive in 2Q is the group’s record-high gross margin of 26.6% just as we thought margins could not climb any higher. This was driven by 
    1. efficiency gains from its distribution centre, 
    2. higher supplier rebates, and 
    3. better sales mix of fresh produce which fetch better margins.
  • However, the ecommerce threat could hit margins

Amazon Prime has launched in Singapore and will be competing in the grocery space.

  • We think the online threat is real and note that SSG has not invested much to build up its own online delivery infrastructure. 
  • While it is still too early to say, we think traditional retailers could embark on a price war as part of a market share protection strategy. Even as SSG’s customer segmentation is arguably less tech savvy, we do not discount the other traditional big boys (NTUC and DFI) feeling threatened by Amazon and competing on price, inevitably forcing SSG to also lower prices. 
  • Accordingly, margins could be under pressure. We think this is an overlooked near-term risk.

Maintain Hold, current valuations of 24x CY18F P/E not appealing

  • We keep our Hold rating and TP of S$0.94 (still based on 23.3x CY18F P/E, 3-year mean) as our earnings forecasts are intact. 
  • We think store closures, lack of new stores and the new ecommerce threat could hamper a stock re-rating, while its c.4% yield should offer some support. 
  • Upside risk to our call includes new sizeable store wins. Also note that SSG’s China store (c.54k sf) will open in Sep 17. Our model assumes this store will operate at breakeven levels.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-07-28
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.940 Same 0.940