Sheng Siong Group - CIMB Research 2018-02-23: Safe Landing In 4Q17; Looking Towards Brighter 2018

Sheng Siong Group - CIMB Research 2018-02-23: Safe Landing In 4Q17; Looking Towards Brighter 2018 SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Safe Landing In 4Q17; Looking Towards Brighter 2018

  • Sheng Siong Group's FY17 core net profit of S$67.6m (+7.9% y-o-y) was within expectations at 100%/97% of our/consensus core net profit estimates (S$67.5m/S$69.4m).
  • New stores were drivers of the 4.2% rise in FY17 revenue. GPM grew to 26.2% (vs. FY16: 25.7%) largely on lower input prices and higher supplier rebates.
  • 2018 outlook is rosier now, with at least four stores (c.32.1k GFA) set to be added in 1H18. Beyond that, guidance is for more opportunities to add new stores in 2018.
  • We lift our FY18-19F EPS by 7.8-8% to account for higher total retail area. We raise our Target Price to S$1.08, based on 22.3x P/E (+ 1 s.d. level) on CY19F EPS.
  • Given the total return of a 20% upside (+16.5% for share price; +3.5% div yield) we upgrade our call to ADD from Hold.

4Q17 core net profit grows 7.9% on operating leverage 

  • Sheng Siong Group (SSG)’s 4Q17/FY17 net profit rose 8.4%/7.9% to S$16.7m/S$67.6m (vs. 4Q16/FY16 net profit of S$15.4m/S$62.7m) on growth in revenue, bolstered by operating leverage. 
  • FY17’s core net profit excludes a S$2.2m refund of prior year's tax received in 3Q17 which will likely be returned to shareholders. 
  • A final DPS of 1.75Scts was announced, taking full-year DPS to 3.3Scts/share and close to our 70% payout forecast at 71.1%.

Lower GFA, but higher revenue per-square-foot (rev psf) 

  • Despite a lower weighted average area of 435.7ksf (vs. FY16: 436ksf), FY17 revenue rose 4.2% to S$829.9m (vs. FY16 of S$796.7m), largely due to higher rev psf of S$1.9k vs. FY16’s S$1.8k with the closure of non-performing stores and better store mix. 
  • FY17 same-store-sales growth (SSSG) improved to 2.1% (vs. FY16’s 0.2%) on a spurt in 4Q17 of 3.2% as consumer sentiment improved slightly towards the end of the year.
  • GPM climbs higher 4Q17 GP margin rose to 26.5% (vs. 3Q17: 26.1%) bringing FY17’s to 26.2% (vs. FY16: 25%) largely on lower input prices, higher supplier rebates and higher fresh food mix. We think this is impressive given the emergence of Amazon Prime in Jul 17 which was expected to have an impact. 
  • Moving ahead, management intends to watch its costs and enhance its product mix in which fresh food seems to garner premium margins.

Four new stores in the bag for FY18F; tender pipeline still exists 

  • Sheng Siong Group guides for four new stores with a total retail area of 32.1k square feet (sf) to kickstart by 1H18 lifting estimated total retail area to 436.1ksf and store count to 48 (from 44 in FY17). 
  • There are still c.18-20 supermarket opportunities available in 2018 and these are potential catalysts for new store growth beyond the 4 already announced.

Raising FY18-19F EPS and introducing FY20F 

  • We raise our FY18-19F EPS forecasts by 7.8-8% to account for higher store gross floor area (GFA) and other income. We introduce FY20F EPS of 4.7Scts which features a GFA of 466.1k (equivalent of 3 small stores) and an average rev psf of S$2.0k. 
  • We keep our dividend payout assumption of 70% in FY18-20F, in line with the payout in FY17.

Upgrade to Add with a higher Target Price of S$1.08 

  • We are heartened by the sustained GPM and Sheng Siong Group’s new store wins in FY17-18F, and believe Sheng Siong Group’s fresh foods focus will assist in defending market share from e-commerce players in the near term. Its balance sheet is strong with a net cash position of 5Scts. 
  • We upgrade our call to ADD with a higher Target Price of S$1.08 on 22.3x P/E (+ 1.s.d level) rolled forward to CY19F. 
  • Catalysts include sizeable new store wins; better SSSG and higher dividend. 
  • Downside risks: fewer-than-expected new stores and lower margins.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-02-23
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.08 Up 0.980