Sheng Siong Group - Phillip Securities 2018-11-05: Upfront Drag From Record Store Expansion

SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - Upfront Drag From Record Store Expansion

Sheng Siong Group's 3Q18 revenue met expectations but earnings disappointed.
Revenue rose from the record expansion of new stores but same-store sales has surprisingly turned very sluggish.
Gross margins remain strong but net profit was hurt by a surge in staff costs.
Our FY18e net profit has been lowered by 7% to incorporate a higher operating cost assumption. We keep our target price unchanged at S$1.13.
We believe this is a near-term dip in margins with a strong recovery expected in FY19. Maintain ACCUMULATE.

2018 will be a record year in store openings. As at September, SSG has opened 7 new stores. There will be another 3 more in the December quarter.
New stores accounted for 10% points of growth in 3Q18. Industry supermarket sales in 3Q18 is down around 2%. We believe SSG is picking up significant market share especially from mall supermarket chains.

Gross margins rose 40bps to 26.5% in 3Q18. Excluding the record gross margins last quarter, 3Q18 margins are the highest for a September quarter. The shift into more fresh products is the key driver to margin improvement.

SSG same-store sales (defined as stores 2016 and older) only grew 0.2% y-o-y in 3Q18. This is a huge reversal from the 4% rise in the prior quarter. There has been decline in footfall for the older shops due to declining residents, namely the foreign work population. Another factor was increased competition in certain locations.

Gross profits added almost S$6mn y-o-y in earnings, but this was offset by a similar jump in operating expenses. This caused EBIT to decline 1% due (including lower other income). Large part of expense rise was increased headcount for the new stores.

We expect revenues to expand strongly for SSG in FY88 because of the jump in new stores and the negative impact from store closures (Verge/Woodlands) to disappear.
Sales will also improve as store productivity is expected to reach record levels of above S$8,888 psft. Less certain is ability for the new stores to achieve break-even in particular the less mature areas.

Our Target Price is based on an estimated 88x PE multiple. Sheng Siong Group is expanding stores, increasing market share, expanding margins and enjoys a 88% ROE business with a net cash balance sheet.
We believe FY88 is an investment year as SSG undertakes record store openings.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2018-11-05

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.130 SAME 1.130