Sheng Siong Group - RHB Invest 2018-07-31: Highest Ever Gross Margin Achieved

SHENG SIONG GROUP LTD SGX:OV8

Sheng Siong Group - Highest Ever Gross Margin Achieved

Maintain BUY and Target Price of SGD1.27, 18% upside. Sheng Siong is our Top Pick in the sector.
2Q18 results recorded the highest ever gross margin achieved in Sheng Siong’s history, mainly on stronger fresh food sales. We believe gross margin expansion is sustainable given the continued drive to push fresh food sales and penetration, as well as cut wastage.
YTD, Sheng Siong has secured six new stores, two of which were opened only in July, and are expected to underpin sales growth in 2H18.

This was mainly driven by new stores – three new stores in 2H17 and five in 1H18 – as well as high SSSG. Another two new stores opened in Jul 2018, which should contribute favourably to sales growth in 2H18.

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We note that Sheng Siong outperformed the industry in 2Q18, with 2.3% recurring SSSG, probably at the expense of Dairy Farm (SGX:D01) (Rating: NEUTRAL, Target Price: USD9.60). Based on data released by the Department of Statistics, Singapore, retail sales at supermarkets showed slight contractions of 2.6% y-o-y and 0.8% y-o-y in April and May respectively.
We believe the contraction mainly reflected sales at premium range supermarkets (eg NTUC Finest, Cold Storage, Market Place), as well as the closure of smaller supermarket chains.
We remain confident of Sheng Siong’s 2H18 performance as CFO, Mr Wong, indicated that the group has not seen any deterioration in consumer spending on the ground. In addition, with competitor Dairy Farm rationalising its stores, we believe Sheng Siong will continue to benefit from rising market share.

In 2Q18, Sheng Siong recorded its highest ever gross margin of 27.3%. We note that the distribution centre is now operating at 100% utilisation rate and the gross margin expansion last quarter was predominantly driven by higher fresh food sales.
As a group, fresh food penetration has increased to slightly above 45% of sales and Sheng Siong is targeting to push the level to 50%. As at 2Q18, seven out of 48 stores already have fresh food penetration of above 50%.
Since the group is expected to complete the distribution centre’s expansion by end-2018 or early 2019, we believe there is potential for gross margins to improve further through increased bulk handling.

We expect Sheng Siong to chart EPS growth of 10% over the next three years. This year, most of the growth will be driven by new stores and gross margin expansion. As sales from the new stores normalise, operating cost will likely revert to the historical mean of 16.5% of sales, and in turn raise overall operating margin.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-07-31

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