Sheng Siong Group - RHB Invest 2018-11-01: Sowing Seeds For FY19 Harvest


Sheng Siong Group - Sowing Seeds For FY19 Harvest

  • Maintain BUY, new Target Price of SGD1.27 from SGD1.30, 18% upside with 4% FY19F yield. Our Target Price is at the high end of the Street.
  • Although Sheng Siong incurred higher administrative expenses in 9M18 on aggressive store expansion, we believe the new stores will pave the way for earnings growth in FY19.
  • We expect FY19 earnings to grow by 17% y-o-y, driven by the ramp-up in sales at these new stores, gross margin expansion and the normalisation of administrative costs as a percentage of sales.
  • Sheng Siong remains our Top Pick for the consumer sector.

Administrative cost to normalise over the course of FY19.

  • Sheng Siong’s high administrative costs dampened earnings growth in 9M18. Opening three stores in the last five months of 2017 and seven stores in 9M18 pushed up fixed costs (rent and labour), while revenue from new stores typically take 2-3 years to reach a mature level, and 6-12 months for their numbers to break even.
  • Moving into 4Q18, the group has three more new stores in the pipeline. As such, we expect administrative expenses to remain high. However, as a percentage of revenue, we expect administrative expenses to taper off over FY19, as the three stores opened in 2017 should reach breakeven levels and revenue of new stores matures.

Opening new stores is the only way to grow.

  • Consumer sentiment has deteriorated due to the difficult market dynamics in the last few months. According to the Department of Statistics, sales in the grocery segment have declined post-2Q18.
  • We expect Sheng Siong’s SSSG to remain muted for FY19, with new stores being the key driver for sales growth. In this respect, we are positive on its FY19 performance, as the 10 stores opened this year will be in their ramping-up phase, and should contribute positively to earnings growth. This is in contrast to Dairy Farm International (SGX:D01), which is in the midst of rationalising its store portfolio and could cede market share under the tepid growth environment.

Maintain BUY, with new Target Price of SGD1.27.

  • We lower our net profit forecasts by 6% for FY18 and 3% for FY19 as a result of higher-than-expected administrative expenses. This lowers our Target Price to SGD1.27, from SGD1.30. However, we believe the new stores will pave the way for higher earnings growth in FY19.
  • We believe the macro-economic environment is likely to remain challenging over the next 12 months. That said, we still like Sheng Siong for its defensive nature and potential to generate earnings growth amidst weakening consumer sentiment next year.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.27 DOWN 1.300