Sheng Siong Group - CGS-CIMB Research 2018-07-30: 2Q18 Ace-ing The Gross Profit Margin Game

Sheng Siong Group - CGS-CIMB Research 2018-07-30: 2q18: Ace-ing The Gpm Game SHENG SIONG GROUP LTD SGX:OV8

Sheng Siong Group - 2Q18: Ace-ing The Gross Profit Margin (GPM) Game

  • Sheng Siong’s 2Q18/1H18 net profit of S$17.1m/S$35.4m was spot on (vs. forecasts of S$16.8m/S$35.0m), with 1H18 forming 48.4%/48.6% of our/consensus FY18F.
  • 2Q18 GPM was stellar at an all-time high of 27.3% (vs. our forecast of 26.8%). Interim dividend of 1.65Scts was in-line (vs. our forecast of 1.63Scts).
  • Maintain ADD and Target Price. We like the stock for its stalwart business and healthy balance sheet. Stock offers a total return of 13.9% (share price: 10.7%; dividend yield 3.1%).

New store and same-store sales propel revenue growth

  • Sheng Siong’s 2Q18 revenue grew 5.7% y-o-y, spurred by new store (sales) growth of 7.8% and comparable same-store-sales growth (SSSG) of 4.2%. This tempered the revenue loss from the shuttering of The Verge and Woodlands Block 6A (-7.2%). The China supermarket which was opened end-17 contributed 0.9% revenue growth y-o-y in 2Q18.
  • Overall, 1H18 revenue grew by 5.4% y-o-y.

Gross profit margin (GPM) at an all-time high

  • Sheng Siong’s 2Q18 GP margin climbed to 27.3%, above our forecast of 26.8%; taking 1H18 GPM to 26.7% (vs. 1H17: 25.8%), attributed to
    1. higher fresh food mix and
    2. lower input cost on higher supplier rebates.
  • In 1Q18, the fresh food mix was at c.43/44% of revenue; we believe this proportion could have increased given the higher GPM in 2Q18.
  • Sheng Siong Group’s (SSG) long-term GPM target is 28-30%.

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Hitting 50 stores

  • It has opened six stores YTD (four new stores in 1Q18 and two more in Jul 18), lifting total stores to 50 and retail area to 447.2k sq ft by year-end.
  • Sheng Siong’s key strategy to expand retail space in Singapore, particularly in areas where its potential customers reside, remains unchanged.

Healthy balance sheet

  • As at end-2Q18, SSG remained in a net cash position (S$75.7m cash, no borrowings).
  • We believe the net cash position is dry powder for any store upgrades (to keep up with retail market innovation) or M&As.

Maintain ADD with Target Price of S$1.18

  • We like Sheng Siong Group’s focus on fresh foods and heartland location that should help it defend market share against e-commerce players in the near term.
  • Catalysts include sizeable new store wins, better SSSG and higher dividends.
  • Downside risks are fewer-than-expected new stores and lower margins.
  • We keep our ADD rating and Target Price (based on 22.2x FY19 EPS, 1 s.d. above its historical 3-year mean of 20.6x).

Cezzane SEE CGS-CIMB Research | Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-30
SGX Stock Analyst Report ADD Maintain ADD 1.180 Same 1.180