Sheng Siong Group - UOB Kay Hian 2018-11-01: 3Q18 Results In Line, Ramping Up Sales At New Stores

SHENG SIONG GROUP LTD (SGX:OV8) | SGinvestors.io SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - 3Q18: Results In Line, Ramping Up Sales At New Stores

  • Sheng Siong Group’s 3Q18 results are in line with our expectations, representing 24.6% of our full-year estimates.
  • Net profit declined 9.4% y-o-y to S$17.8m. New stores drove revenue 8.0% higher y-o-y to S$227.9m, but the increase was offset by an increase in administrative expenses which climbed 16.6% y-o-y.
  • Sheng Siong remains in transition as it ramps up new store sales.
  • Maintain HOLD. Target price: S$1.15. Entry price: S$1.04.



3Q18 RESULTS


3Q18 results in line.

  • Sheng Siong Group’s (SSG) results are in line with our estimates. Revenue rose 8.0% y-o-y mainly attributed to new store openings. Gross margin crept up to 26.5% (3Q17: 26.1%) due to better sales mix, suppliers’ rebates and improvement in efficiency in the central distribution centre.
  • Sequentially, gross margin slipped from 27.3% in 2Q18 as the group pushed for more sales volumes to drive fresh produce sales. However, the solid revenue growth was offset by higher administrative expenses which rose 16.6% y-o-y in tandem with new store openings.

Lower same-store sales (SSS) growth.

  • In the quarter, comparable SSS came in flat at 0.2% due to softer consumer sentiment and keener competition. Excluding the growth in Block 506 Tampines store which saw retail area expansion by 15,000 sf to 25,000 sf, comparable SSS would have decreased by 0.6% in 3Q18.



STOCK IMPACT


Committed to store expansion plans.

  • Sheng Siong Group’s new stores at Block 573 Woodlands and Junction 10, 1 Woodlands Road commenced operations in Oct 18. In addition, Block 451 Bukit Batok will be operational in Nov 18, bringing the total store count in Singapore to 54.
  • Management remains committed to store expansions in Singapore, especially in areas where SSG does not have a presence. Sheng Siong Group is on track to meet our expectation of 9 new stores for 2018.


EARNINGS REVISION/RISK

  • We adjust our 2019-20 earnings forecast to S$76.3m (-3.0%) and S$81.6m (-2.0%) respectively. We have factored in higher administrative expense as a result of new store openings.
  • Risks include:
    1. price war between Amazon and RedMart which might trigger associated price reductions in brick-and-mortar players, and
    2. return of irrational bidding for supermarket units, resulting in fewer new store wins.


VALUATION/RECOMMENDATION

  • Maintain HOLD with PE-based target price of S$1.15, pegged to peers 2019F PE of 22.7x. 
  • We have switched our valuation methodology to PE better capture the near-term earnings profile of the company.


SHARE PRICE CATALYST

  • Pick up in SSS growth.
  • Higher-than-expected new store openings.
  • China expansion surprising on the upside.






Yeo Hai Wei UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-11-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.15 UP 1.140



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