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

Sheng Siong Group - OCBC Investment 2017-07-31: Staying Prudent SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Staying Prudent

  • In-line results.
  • Sustainable margins.
  • Looking for new stores.

2Q17 results in-line 

  • 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.

Opportunities for new stores remain 

  • 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.

Strong management behind sustainable margins 

  • 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.

Maintaining healthy balance sheet 

  • 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