Sheng Siong - RHB Invest 2017-07-28: Lower Dividend Payout Is Disappointing

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong - Lower Dividend Payout Is Disappointing

We downgrade Sheng Siong to NEUTRAL (from Buy) with a new SGD1.05 TP (from SGD1.21, 11% upside) on a lower dividend payout ratio.
The board has decided to cut its payout ratio to 70% (previously: 90%). We believe this would be the run rate moving forward.

On 2Q17’s performance, we note that PATMI of SGD16.1m was in line with our expectation.
We have always liked Sheng Siong for its stable and resilient business model, but think the lower dividend is a disappointment. A key re-rating catalyst would be new store openings.

We have always like Sheng Siong for its resilient business model due to its high proportion of fresh offerings and mass-market positioning.
We note that the company was probably gaining market share in the last quarter with revenue growth of 6.8%. This was despite flattish industry numbers in April and May – primarily driven by the maturing of four stores that were opened in 2016. Excluding its Woodlands store – which is set to close in October – comparable same store sales grew 1.7%. This was also ahead of industry numbers.

Gross margin expanded 5ppts YoY to 26.6% for 2Q17.
Given that the existing distribution centre is operating close to full capacity – and the extension coming up in 2018 is only expected to raise capacity by 10% – we think that the upside to gross margins expansion may be limited, moving forward.

During the quarter, the company secured two new sites, which are expected late this year.
According to the Housing and Development Board (HDB) website, there are 12 new sites available for supermarkets to lease over the next six months.
However, some of these sites are located within 1km of each other or close to Sheng Siong’s existing stores. Therefore, while there are prospects for more store openings in 2018, we note that revenue/store may gradually decline in the future due to cannibalisation of sales across stores in the same area.

Amazon launched Prime Now in Singapore two days ago. Sheng Siong believes its competitive edge still lies in its fresh offerings.
According to management, percentage of sales from fresh produce increased to 44% (40-41% in the past). It is to continue to improve its fresh offerings to retain customers.
As online grocery is still at its infancy stage in Singapore, Sheng Siong seems to be adopting a “wait-and-see” attitude. CFO Mr Wong Soong Kit has said the company was “not going to be aggressive” in the e-commerce space at the moment.

We are disappointed with the lower payout ratio, which brings dividend yields down to 3.3%.
Management said the board preferred to hold more cash, which may be used for future investments. As such, we adjust our TP down to SGD1.05 (from SGD1.21), which is based on a blended valuation method.
Newly secured stores would be a key re-rating catalyst for the stock.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-28

RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.05 Down 1.210