Sheng Siong Group - Phillip Securities 2017-07-28: Two New Stores In 2H17; Cutting Dividends For Growth

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Two New Stores In 2H17; Cutting Dividends For Growth

Sheng Siong Group's 1HFY17 Revenue/PATMI met 50%/48% of our full year FY2017 expectations.
Retail landscape showed signs of weak recovery; Mature stores registered slight growth after six consecutive contractionary quarters.
Lower dividend payout of 70% in 1H17 as compared to 90% previously.

Mature stores registered slight growth of 0.9% YoY in 2Q17 after a contractionary 2H16 and a flattish 1Q17. Excluding the drag from Woodlands 6A store, which was impacted by the impending en-bloc activity, same store sales growth (‘SSSG’) would be 1.7% YoY.
Woodlands 6A store will be closed in Oct-17.

Gross margins improved 50 bps on (i) lower input prices; (ii) improvement of product mix with sales of higher-margin fresh products; and (iii) increase bulk handling.

The Group does not have a fixed dividend policy and its war chest of S$26mn* could be deployed to expand by another 4 stores.
* Cash and cash equivalents of S$69.3mn as at end-Jun17, less 1H17 dividend payout of S$23.3mn and S$20mn construction cost for the new extension to the distribution centre

While Singapore’s economic growth for 2017 is likely to grow above last year’s 2%, sale of supermarkets remained sluggish. We remained optimistic on Singapore’s retail outlook on the back of better economy prospect and growing household net worth.

Closure of two underperforming stores and two new stores opening in 3QFY17 should lift FY18e performance.
We reaffirm FY17e gross margin to steady at c.26% in view of its continuous margin expansion initiatives amidst a benign inflation. 1H17 gross margin was at 25.8%.
Competition remains intense notwithstanding the threat from a new e-commerce entrant. With Amazon Prime Now joining the party, there could be a potential price war triggered by the two major online groceries retailers, i.e. Redmart and Amazon Prime Now.
Nonetheless, the Group will not pursue on an aggressive expansion in its ecommerce operation. Instead, it will continue to focus on strengthening its fresh product offerings, where its competitive moat remains.

We expect the five new stores opened in 2016, particularly the Yishun Junction 9 store, to provide support to FY17e topline growth. However, a lower number of new store openings in 2017 wold limit FY18e sales growth. There were no new stores opened in 1H17.
YTD, we expect four stores, namely the Yishun Junction 9 store (Sep-16), the newly renovated and bigger store at Tampines Central store (Jun-17) as well as two new stores in Bukit Panjang (to be opened in Sep-17) and Woodlands (to be opened in Oct-17), to boost FY18e sales growth.

There are 12 new supermarkets units pending completion by Dec-17 according to data on HDB HBiz website. However, management shared its concern on the proximity of these locations with its existing stores.

Nonetheless, we adjusted FY18e PATMI 2% downwards on
1. lower revenue due to lack of growth drivers; and
2. lower other income due to the absence of government grants from Wage Credit Scheme.
We also cut our dividend payout for FY17-18e to 70%, which gives an implied dividend yield of 3.4% and 3.5% respectively.
Re-rating catalysts:
1. Successful bidding of new stores; and
2. Improvement of product mix.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2017-07-28

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