Sheng Siong Group - Phillip Securities 2017-12-18: Still A Bargain Buy

Sheng Siong Group - Phillip Securities 2017-12-18: Still A Bargain Buy SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Still A Bargain Buy

  • Expanding retail footprint coupled with a recovery in trading environment.
  • Sustainable margins with upside potential from improving scale, favourable input prices and better product mix.
  • Maintain BUY with target price at S$1.13 based on 4.93 cents FY18e EPS and 23x forward PER.



BACKGROUND

  • Sheng Siong Group Ltd (SSG) is the third largest supermarket chain in Singapore. It provides low-cost essential products to mass-market consumers through its no-frills approach. 
  • As of 30 Sep-17, Sheng Siong Group has 43 outlets located in Singapore’s heartlands spanning over 430,000 sqft.


INVESTMENT MERITS / OUTLOOK


1. Five new stores continue to drive FY18e growth and on-track to its short-medium term 50-stores target. 

  • Sheng Siong Group Ltd (SSG) has consistently delivered growth over the years. Its top line growth hinges on the number of new store openings. It has opened a new store in Sep- 17, and has recently secured four new HDB stores (gained from the recent bidding exercise). These will bring SSG’s store count to 46 by 1Q18.

2. More stores up for bidding from government’s rejuvenation projects. 

  • There are seven new supermarkets units pending completion by Mar-18 and 18 more in 2Q18 to 4Q21, according to data on HDB HBiz website. We remain cognizant of competition and potential cannibalization from these new bidding units, due to the proximity of these stores with each other as well as with existing supermarkets.

3. New capacity at its distribution centre

  • New capacity at its distribution centre (+50k sqft by 3Q18) bodes well with its strategy to grow its store count and to ramp up fresh product offerings.

4. Sustainable gross margin at c.26%. 

  • Margin gains from enhanced efficiency from the central distribution centre, favourable input prices (still a buyer’s market for groceries), and higher fresh participation.

5. Proven track record of ramping up fresh offerings. 

  • Fresh products are least vulnerable to Amazon Prime’s threat and yields higher margin compared to non-perishable groceries. Currently, fresh products contribute a high 43% to grocery sales, an improvement from 41.5% a year ago.

6. Zero-debt and strong operating cash flows to support 70% dividend payout and expansion.

  • Net cash position of S$64.5mn to support the construction of the central warehouse, new stores’ fitting costs and maintenance CapEx. We expect a 3.7% FY18e dividend yield.


RECOMMENDATION

  • Maintain BUY with target price at S$1.13 based on 4.93 cents FY18e EPS and 23x forward PE multiple. We expect the five new stores opened in 2017/18 coupled with the improving consumer’s sentiment and margin gains to lift FY18e Revenue and PATMI by 6.9%. 
  • 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/ 2017-12-18
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.130 Same 1.130



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