Sheng Siong Group - Phillip Securities 2018-02-26: The Worst Is Over

SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - The Worst Is Over

Sheng Siong Group's FY17 Revenue/PATMI were in line with our full year estimations.
11 new stores growth and improving macro backdrop to mitigate absence of contribution from the Verge and Woodlands Blk 6A.
Declared final dividend of 1.75 cents per share (Full year dividend of 3.30 cents, or 71.1% payout ratio in FY17).
Maintain BUY and Target Price at S$1.13.

Same-store-sales growth (SSSG), excluding contributions from Loyang, Verge and Woodlands Blk 6A stores, improved from FY16’s 0.2% to 0.5% in 1H17 and 3% in 2H17. Overall SSSG was at 2.1% in FY17.
Fewer and late store openings (opened 1 in Aug-17, and 2 in end-17) contributed to slower new stores growth in FY17 at 4.5% vs 6.2% a year ago.
In FY18e, we would see the full impact from the closure of the Verge and Woodlands Blk 6A stores, which contributed 5.3% to FY17 Revenue. Nonetheless, improving consumer sentiment coupled with expanded store count should mitigate the negative shortfall. We think 1Q18 should be a strong start, owing to seasonality – there is a 2- weeks window shift in 2018 Chinese New Year (Feb-18 vs Jan-17).

Margin drivers remain intact: efficiency gains derived from the central distribution centre, favourable input prices (still a buyer’s market for groceries), as well as higher Fresh products penetration rate (44% of FY17 Revenue, +1% point from FY16’s).

Free cash flow turned positive from -S$11.2mn to S$60.9mn in FY17. We believe that the Group’s free cash flow should improve further in FY18, as
1. set up costs of Kunming store in China has incurred in FY17; and
2. absence of huge ticket purchase in FY18 (such as FY16’s S$89.9mn purchases of retail space).
After accounting for S$31mn FY18e CapEx (including S$16mn for the construction of central warehouse, and the remaining being new stores’ fitting costs and maintenance CapEx), we expect FY18e free cash flow to be S$65.6mn.
Growing free cash flows could be a prelude to a higher dividend payout in future. Meanwhile, the expansion to the warehouse is on-track to be completed by FY18, adding c.97k sqft of storage area.

Its first flagship store in China has soft-launched in Nov-17 but may take a longer period to breakeven. Including pre-operating costs, the Group’s share of the losses was S$0.4m in FY17 and could increase up to S$1mn in FY18e.

Tailwinds from favourable macro backdrop:
1. Inflation to remain benign and stronger confidence to spur consumer spending.
2. Government grants to support bottom line. FY18e Other Income to be comparable to FY17’s S$10.3mn. The recent 2018 Singapore Budget has extended the Wage Credit Scheme (WCS) to 2020, though the level of co-funding will be tapered. It will provide co-funding of 20% for 2018 (same as 2017), 15% for 2019 and 10% for 2020. On the other hand, it has obtained approval for S$1mn productivity grant YTD, (37% of FY17’s S$2.7mn).
3. 11 new stores continue to underpin FY18e growth. 7 new stores opened in 2016-17, together with the 4 new HDB stores gained from the recent bidding exercise would mitigate the closure of two big stores. The 4 new stores will increase net retail area by 7.9% by Apr-18 as compared to end-FY17.

There are 13 new supermarkets units pending completion by 2018, according to data on HDB HBiz website. However, management shared its concern on the proximity of these locations with existing stores, which include those under Sheng Siong’s brand.

Sheng Siong Group is currently trading at 20.0x trailing PER, which is below its regional peers’ average of 39.3x. It also provides an attractive FY18e dividend yield of 3.7%, as compared to its regional peers’ average of 1.6%.

Soh Lin Sin Phillip Securities | https://www.stocksbnb.com/ 2018-02-26

Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.130 Same 1.130