Sheng Siong Group - RHB Invest 2018-12-14: Among The More Defensive Names In Play


Sheng Siong Group - Among The More Defensive Names In Play

  • Maintain BUY and Target Price of SGD1.27, 16.5% upside plus 3.8% FY19F yield.
  • Sheng Siong remains our Top Pick in the consumer sector for FY19F. In view of market uncertainties led by the US-China trade war, we continue to like Sheng Siong for its defensive nature.
  • Moving into FY19F, earnings should be driven by stronger growth with the maturing of its 10 new stores that were opened in 2018, as well as gross margin expansion after the completion of its distribution centre extension.

Reaping the harvest.

  • Sheng Siong opened 10 new stores in 2018, bringing its total store count to 54 excluding the store in China. While the aggressive expansion has resulted in an increase in administrative expenses, we expect sales at these 10 new stores to ramp up in 2019, thereby improving overall operating margin for the group.
  • The extension at the group’s distribution centre is also expected to complete in 2019. This should add another 20% capacity at its existing distribution centre, which would allow the group to increase its direct-purchase and bulk handling capabilities.

Gross margin expansion to continue.

  • We believe the increase in operational efficiencies brought by the extension at its distribution centre as well as higher sales mix of fresh produce will help to raise gross margins.
  • On top of that, with a higher number of store count, the group will be able to obtain higher supplier rebates to boost its gross margins.

Gaining market share.

  • We expect Sheng Siong to gain market share as its competitor, Dairy Farm is rationalising its store portfolio in Singapore.
  • In addition, we think there is no lack of opportunities for Sheng Siong to open more stores as the Housing & Development Board (HDB) still has nine new sites allocated for supermarkets under open tender bidding from now until the end of 2019.

BUY with Target Price SGD1.27.

  • We like the group’s defensive and cash-generative business model. We note that Sheng Siong’s same-store sales growth has been performing in line with the industry, while its new stores have been adding a new stream of revenue for the group.
  • The stock offers a dividend yield of c.3.5-4% for FY19F.
  • We expect Sheng Siong to outperform other industries amidst market uncertainties.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 1.270 SAME 1.270

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