Sheng Siong Group - DBS Research 2018-07-31: Growth Momentum Intact

SHENG SIONG GROUP LTD SGX:OV8

Sheng Siong Group - Growth Momentum Intact

We maintain our BUY rating for Sheng Siong as growth is driven by more stores, improving efficiencies and margins. Gross margins have continued to strengthen with more supplier rebates and lower costs. We see this improving further when its warehouse expansion is operational in FY19F.
Near term outlook for new HDB supermarkets is robust with at least 7 outlets up for tender in the next six months.
Same store sales growth (SSSG) and sales per square feet matrices also remain strong. Dividend yield is decent at 3-3.5% with potential scope for a higher payout.

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We do not think Amazon’s entry will pose a serious threat to Sheng Siong for now as
1. Sheng Siong’s target customers are less of the millennials who are open to online grocery shopping;
2. Amazon’s warehouse is relatively small;
3. Amazon is a more direct threat to Redmart; and
4. the online market is small currently and will take time to gain share from brick-and-mortar stores rather than ramp up rapidly.

We believe that Sheng Siong, with its decent store network and logistics chain, could possibly be a takeover target for online players eventually. Online players such as Alibaba’s 盒马鲜生 and Amazon (Wholefoods) are taking the online-to-offline route, and are operating physical stores.
We see scope for higher dividend payout if there is excess cash on its books.

Our target price for Sheng Siong is S$1.26, based on 25x FY19F PE, as well roll over our earnings base from FY18F to FY19F.
The valuation is pegged at +1SD of its historical mean valuation since listing and below regional peers' average of 26x PE.

Store openings, price competition. Revenue growth will be led by new store openings. Excessive discounts and promotions in the market by competitors will ultimately result in lower margins.

Sheng Siong Group’s earnings of S$17.2m (+6.6% y-o-y) and revenue of S$213m (+5.7% y-o-y) were within our estimates. Revenue growth was largely driven by same store sales growth (SSSG) which grew 4.2% and new stores sales growth of 7.8%.
China sales grew 0.9% y-o-y while contribution from the Verge and Woodlands stores, which were closed during the period, was 7.2% lower y-o-y. New stores were opened at Fajar, Woodlands Street 12, Edgedale Plain, Fernvale, Anchorvale, Canberra, and ITE Ang Mo Kio. Annualised sales per square feet for the quarter rose 11% y-o-y from S$1,764 to S$1,954.
Sheng Siong declared an interim DPS of 1.65 Scts per share, equivalent to 70% payout ratio, in line with our expectations.

Gross margin was 7ppt higher at 27.3% from 26.6% in 2Q17 on lower input costs due to better pricing and higher supplier rebates for special promotions and volume discounts. Operating and net margins remained relatively stable at 8.9% and 8.1% respectively.
China was close to breaking even in 2Q18 as 1H18 losses almost equalled 1Q18 losses of $0.1m.

This is overall a positive quarter in our view apart from other income being marginally smaller than expected. Growth continues to be driven by new stores while SSSG has remained in positive territory despite an overall decline in Singapore supermarket retail sales for April and May.
China is close to breaking even in 2Q18 and gross margin has continued to strengthen. Other income was a tad below due to lower sales of scrap cardboard boxes and government grants.

We adjust our earnings forecast marginally lower to reflect the current run rate for other income. Maintain BUY with a higher Target Price of S$1.26 based on 25x FY19F EPS, as well roll over our earnings base from FY18F to FY19F.
Stock offers decent dividend yields at 3-3.5%. BUY for 18% upside.

Alfie YEO DBS Group Research Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-07-31

SGX Stock Analyst Report BUY Maintain BUY 1.26 Up 1.200