Sheng Siong Group - DBS Research 2018-10-31: New Stores Driving Growth


Sheng Siong Group - New Stores Driving Growth

  • Sheng Siong Group's 3Q18 earnings within estimates.
  • New stores led revenue growth and gross margin expansion, offset by higher admin expenses.
  • Trimmed FY19-20F earnings by 2% each to reflect higher operating cost structure.
  • Maintain BUY, Target Price S$1.24.

Maintain BUY and Target Price S$1.24 on ongoing growth momentum.

  • We maintain BUY for Sheng Siong as we continue to see growth driven by more new stores after opening eight new stores since 4Q17, improving efficiencies and margins from better sales mix, and warehouse expansion due to kick in from FY19F.
  • Near term outlook for new HDB supermarkets remains robust with five outlets up for tender in the next six months.
  • Dividend yield is decent at 3-3.5% with potential for a higher payout.

Potential catalysts.

  • 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.

Key Risks to Our View:

  • 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.

WHAT’S NEW - 3Q18 results

Revenue largely driven by new stores:

  • Revenue growth was largely driven by new stores (+10.6% y-o-y), with China sales growing by 1.2% y-o-y, while same store sales growth (SSSG) expanded by 0.2% y-o-y, helped by the Tampines Block 506 outlet.
  • New stores opened from 4Q17 included Woodlands St 12, Edgedale Plain, Fernvale, Anchorvale, Canberra, ITE Ang Mo Kio, Bukit Batok Block 440, Yishun Block 675 and Woodlands Block 785.
  • Annualised sales per square feet for the quarter rose 5.8% y-o-y from S$1,975 to S$2,091.

Lower operating margins due to higher than expected admin expenses:

  • Administrative expenses were higher than expected at S$39m (+17% y-o-y), and 5% above our S$37m estimate. Increase in administrative expenses were largely from staff and higher rents due to loading for 8 new stores since 4Q17.

Still positive.

  • Both revenue and gross margins continue to deliver y-o-y growth. However, the only dampener to earnings was higher than expected admin expenses. This is naturally stemmed from a higher cost base from a larger number of 8 new stores, a deviation from the marginal store count increase seen in past quarters.
  • We see growth going forward driven by new stores, with margin expansion intact from additional warehousing space due to kick in from FY19F.

Maintain BUY, Target Price S$1.24.

  • We have lowered our earnings forecast marginally by 2% p.a. for FY19-20F to reflect the current run rate for administrative expenses, offset by higher revenue on the back of a higher store count.
  • Maintain BUY with a higher Target Price of S$1.24 based on 25x FY19F EPS.
  • Stock offers decent dividend yields at 3-3.5%. BUY for 15% upside.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-10-31

SGX Stock Analyst Report BUY MAINTAIN BUY 1.24 DOWN 1.260