Sheng Siong Group - Maybank Kim Eng 2018-05-01: Positive Prospects & NDR Highlights

SHENG SIONG GROUP LTD SGX: OV8

Sheng Siong Group - Positive Prospects & NDR Highlights

Sheng Siong Group's 1Q18 results were in line, earnings met 25% of ours and consensus FY18E. Revenue and earnings grew 5.1% and 6.6% y-o-y, respectively driven by robust new store sales growth and comparable store sales growth.
Key highlights in our post-results NDR:
1. ample new stores opened since 4Q17 and healthy consumer sentiment are expected to drive growth;
2. fresh products remain a key differentiator to defend against online threats and competitors;
3. good expansion pipeline as more new stores are up for tender; and
4. further penetration into new market segments and China.

The new store sales growth of 6.7% came from 7 new stores, where 6 of them only started since 4Q17, and there should be ample room for them to grow further before reaching a steady state. SSG operates 48 stores as of 1Q18.
On the other hand, the comparable store sales growth reached a new record 5.6%, attributable to:
1. the recovery in consumer sentiment started in 2H17; and
2. re-opening and expansion of stores, as well as spill-over of customers to nearby stores after the closure of two major stores.
In addition, gross margin increased 1.2ppt y-o-y due to a higher sales mix of fresh products and supplier rebates. These positive forces are expected to sustain in 2018.

We expect future earnings growth to remain healthy from:
1. ramping up of 7 new stores opened since 4Q17 and 2 more new stores targeted to open in 2Q18;
2. healthy comparable store sales growth from good consumer sentiment; and
3. ample expansion pipeline, where around 10 new supermarket sites are up for tender, much higher compared to the past two years.
In addition, we see upside from margin expansion as SSG increases its sales mix of fresh products, more automation, and completion of its central warehouse expansion, targeted in end-2018.
Beyond that, management is seeking to penetrate into new market segments by engaging with the millennial in new housing estates and targets to expand further via 2-3 new stores in Kunming, China, over the next 1-2 years.

Stronger-than-expected revenue growth on the back of strong GDP, wage and employment growth.
Better-than-expected food-cost savings or lower labour costs following automation.
Wins more-than-expected tenders for public-housing sites for new supermarkets.

China supermarket does not take off.
Unable to pass on higher food costs due to competition.
Manpower shortages affecting Singapore operations. Due to high mix of fresh food, it may need more workers per store than its competitors.

John Cheong CFA Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-05-01

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