Sheng Siong Group - OCBC Investment 2018-04-30: Off To A Smooth Start In FY18

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SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group - Off To A Smooth Start In Fy18

• 1Q18 within expectations.
• New stores to sustain growth.
• GPM likely to stay stable.

Bottom-line growth driven by higher revenue and GPM

• Sheng Siong Group’s (SSG) 1Q18 revenue grew 5.1% y-o-y to S$228.3m, driven by seven new stores (+6.7%), same store sales growth (SSSG, +5.6%), and contribution from China’s store (+0.8%) but offset by a 8.0% y-o-y decline in revenue from permanent closure of The Verge and Woodlands Block 6A stores. 
• Gross profit improved 10.0% y-o-y to S$59.8m on higher sales mix of fresh products which command higher GPM versus non-fresh products, as well as higher suppliers’ rebates. Consequently, even though administrative expenses grew 11.8% y-o-y largely due to net increase in headcount to operate the seven new stores after absorbing staff released from the closure of two stores, Sheng Siong Group’s 1Q18 PATMI were within our expectations as it rose 6.6% to S$18.3m, and formed 26% of our full year estimate. 
• The new store in Kunming, China, contributed 0.8ppt to 1Q18 total revenue growth, but recorded S$0.1m loss in 1Q18.

Expect more new stores to open in FY18

• Looking ahead, we expect the 5.6% SSSG recorded in 1Q18 to be sustainable for FY18 driven by a confluence of factors including:
  1. expanded Tampines 506 store (10k sqft to 25k sqft) that only opened in Jun 17,
  2. spillover of customers from closure of The Verge store to another nearby store at Jalan Berseh, as well as from closure of Woodlands 6A to other stores in Woodlands.
• That said, without these one-off factors, we expect SSSG to normalize to 2-3% from FY19 onwards. 
• For new stores, Sheng Siong Group was successful in two new store bids, which are expected to commence operations in 2Q18. Management also noted tender pipeline remains healthy in FY18, and will continue to bid rationally for new HDB stores in re-developed and new neighbourhoods, as well as expand in HDB estates without Sheng Siong Group’s presence. 
• Concurrently, Sheng Siong Group will also continue to explore opening more stores in China.

Cash cow supported by defensive business

• On in-line 1Q18 results, higher store count and stable GPM ahead, we lift our FY18F-FY22F EPS by 2%-5%, and increase our Fair Value from S$1.06 to S$1.12. 
• We continue to like Sheng Siong Group for its stability and strong consistent record in operating cash flow generation.

Eugune Chua OCBC Investment | http://www.iocbc.com/ 2018-04-30

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