Sheng Siong Group - OCBC Investment 2017-07-31: Staying Prudent

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Staying Prudent

Sheng Siong Group (SSG)’s 2Q17 results came in within expectations, as revenue grew 6.8% YoY to S$201.5m and PATMI was up 6.3% to S$16.1m.
1H17 revenue of S$418.6m and PATMI of S$33.3m formed 51%-52% of full year estimates.
2Q revenue was driven by new stores (+5.2%), same store sales (SSSG) (+0.9%) and 0.7% from Loyang Point and The Verge stores. If the contraction from the 41.5k sq ft Woodlands store is excluded, SSSG would have been 1.7% with the group noting improved consumer sentiment.

The Verge store (45k sq ft) has closed in the third week of Jun and the 41.5k sq ft Woodlands store’s closure is extended from Aug to Oct, while a new 4k sq ft store at Bukit Panjang as well as a new 12k sq ft store at Woodlands St 12 will open in Sep and Oct, respectively.
Looking ahead, the group will need new stores particularly in key growth and untapped areas to maintain topline growth.
There are currently 12 HDB supermarket locations up for bidding in the next six months albeit there is a risk of cannibalization in certain sites, and opportunities exist in the closed tenders as well.

Gross profit margin (GPM) was higher at 26.6% (vs. 26.1%) due to efficiency gains from the central distribution centre, higher level of suppliers’ rebates and better sales mix (fresh produce now constitutes 44% of sales). We expect these drivers to be sustainable for GPM to be maintained within a range of 25-26% for full year.
We also reiterate that SSG’s variable compensation structure can also help to control costs.

Interim dividend was reduced from 1.90 Scents/share last year to 1.55 S-cents/share, implying a forward annualized dividend yield of ~3.3% based on Sheng Siong's last trading price.
If history is any indication, we believe the group is opting to stay prudent and maintain a healthy balance sheet, while we do not rule out the possibility of the group purchasing stores in ideal locations.
All considered, we raise our cost of equity to 6.4%, which brings our Fair Value Estimate down to S$1.04 (previous: S$1.15) with BUY rating unchanged.

Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2017-07-31

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.04 Down 1.150