Sheng Siong Group (SSG SP) - UOB Kay Hian 2018-04-30: 1Q18 Results In Line; 6 New Supermarket Wins In 2018. Downgrade To HOLD

Sheng Siong Group (SSG SP) - UOB Kay Hian 2018-04-30: 1Q18 Results In Line; 6 New Supermarket Wins In 2018. Downgrade To Hold SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - 1Q18 Results In Line; 6 New Supermarket Wins In 2018. Downgrade To Hold

  • Sheng Siong Group’s 1Q18 results were in line with our expectations. Net profit grew 6.6% y-o-y, driven by contributions from new stores and stronger same-store sales growth.
  • Since our upgrade in Feb 18, the company has secured two new supermarkets, bringing new-store wins to six for the year. Same-store sales growth of 5.6% y-o-y for 1Q18 signals better consumer sentiment.
  • As the stock has rallied almost 10% since our upgrade, we downgrade the stock to HOLD and fine-tune our PE-based target price to S$1.09. 
  • Entry price: S$0.98.



RESULTS

  • In-line 1Q18 results. Sheng Siong Group’s (SSG) results were in line with our estimates. Revenue rose 5.1% y-o-y, mainly attributed to new store openings, and an improvement in same-store sales (SSS) growth to 5.6% in 1Q18 (1Q17: -2.1%). Gross margin rose to 26.2% (1Q17: 25.2%) due to a better sales mix and some supplier rebates. Sequentially, gross margin dipped from 26.5% in 4Q17 to 26.2% in 1Q18, in line with seasonal trends as the group pushes for more volumes during the Chinese New Year season.
  • Great start to 2018. On top of the four new outlets won at end-Feb 18, the group has secured two new stores at Bukit Batok Block 440 (5,900sf) and Yishun Block 675 (5,320sf) which will add 11,220sf in new retail area to the group. The new outlets are smaller, representing a change in the group’s strategy to target smaller and more efficient outlets which yield higher revenue/sf. As at end-1Q18, the group had a total retail area of 436,000sf, down 4.6% y-o-y, due to the closure of the mega supermarkets at The Verge and Woodlands Block 6A. Revenue has improved from S$475/sf in 1Q17 to S$519 in 1Q18.


STOCK IMPACT

  • 9 new HDB supermarket units up for tender within the next six months. On the supply side, our online channel checks at Place2Lease.com indicate a healthy supply of about nine new supermarket outlets up for bidding over the next six months. This does not include any tenders through the closed bidding channel. Assuming a conservative win rate of 15%, we expect SSG to win one new shop for 2018, which will bring total supermarket wins for the year to seven.


EARNINGS REVISION/RISK

  • Minor tweaks to our earnings estimates as we account for the latest two new supermarket wins which were smaller than our expected size of 8,000sf per new supermarket. We lower our 2018-20 net profit estimates by 1.2%, 1.1% and 1.0% respectively.
  • The risk of a price war between Amazon and RedMart remains, which will lead to other brick-and-mortar supermarkets to lower prices.
  • A return of irrational bidding could result in SSG winning fewer new stores.


VALUATION/RECOMMENDATION

  • Sheng Siong Group’s share price has done well over the last two months, returning about 10% since end-Feb-18. 
  • We downgrade the stock to HOLD and fine-tune our PE-based target price to S$1.09 (previously S$1.10), pegged to peers 2018F PE of 22.5x. 
  • Entry price is S$0.98.


SHARE PRICE CATALYST

  • A pick up in SSS growth.
  • Higher-than-expected new store openings.
  • Expansion in China surprising us on the upside.





Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-30
SGX Stock Analyst Report HOLD Downgrade BUY 1.09 Down 1.100



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