Sheng Siong Group - DBS Research 2019-02-26: New Stores & Cost Efficiencies Driving Growth


Sheng Siong Group - New Stores & Cost Efficiencies Driving Growth

  • Sheng Siong’s 4Q18 earnings in line, growth led by new stores and better operating margins. 
  • Operating margins continue to expand led by lower operating costs. 
  • Final DPS of 1.75 Scts declared, bringing full year DPS to 3.4 Scts. 
  • Maintain BUY and S$1.25 Target Price.

Maintain BUY and Target Price S$1.25 on ongoing growth momentum.

  • We maintain our BUY recommendation for SHENG SIONG GROUP LTD (SGX:OV8).
  • Growth continues to be led by new stores and cost efficiencies. Ten new stores were opened in 2018, bringing total Singapore store count to 54 as at end-Dec 2018. Improving efficiencies and margins from better sales mix, and warehouse expansion to kick in from FY19F will also support better margins.
  • Sheng Siong's growth strategy is to open new outlets in areas that it has no presence. The near-term outlook for new supermarket supply in HDB estates looks good with five outlets up for tender in the next six months.
  • Dividend yield based on the current Sheng Siong share price is decent at 3.3-3.5% with potential for a higher payout.

Where We Differ:

  • We do not think online grocery retail will pose a serious threat to Sheng Siong for now as
    1. Sheng Siong’s target customers are less of the millennials who are open to online grocery shopping;
    2. warehouses of online grocery retailers are relatively small compared to Sheng Siong;
    3. the online market is small currently and will take time to gain share from brick-and-mortar stores rather than ramp up rapidly.

Potential catalysts.

  • We believe that Sheng Siong with its decent store network and logistics chain could be a takeover target for online players eventually. Online players such as Alibaba’s Hema ( 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.


  • Our target price for Sheng Siong is S$1.25, based on 25x FY19F PE. The valuation is pegged at +1SD of its historical mean valuation since listing and is below regional peers' average of 26x PE.

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 - 4Q18 results in line

4Q18 earnings in line, revenue growth led by new stores:

  • Sheng Siong's 4Q18 earnings of S$17.5m (+5.1% y-o-y) was in line with our expectations. Revenue of S$222m (+10.7% y-o-y) was driven from new stores and China (+15.5%), with some drag from lower SSSG of 0.4% (excluding Tampines store renovation) and 2.1% from the closure of the Verge and Woodlands stores.
  • 4Q18 saw three new stores opening - Woodlands block 573, Junction 10, and Bukit Batok block 450 – with total outlets reaching a total of 54 as at end-Dec 2018.
  • China’s Kunming store saw a marginal full year loss of S$0.7m.
  • A final DPS of 1.75 Scts was declared. Including interim DPS of 1.65 Scts, total DPS amounted to 3.4 Scts for FY18, equivalent to a 72% payout ratio.

Gross margins expanded:

  • Headline gross margins remained stable at 27.1%. Core gross margins after reclassification to COGS would have expanded by 0.6ppt from 26.5% in 4Q17 on lower prices for goods, higher supplier rebates from promotions and volume discounts, more efficient distribution chain, and a higher fresh product mix driving improved gross margins.
  • There was reclassification of items including direct overhead costs.

Higher operating profit margin at 8.5%.

  • Sheng Siong's 4Q18 Operating Profit was S$18.7m (+13.3% y-o-y), with margin expanding to 8.5% (+0.2ppt) on relatively lower opex. Operating expenses increased by 7.4% y-o-y to S$41.4m, slower than the increases in revenue and gross profit. Admin, distribution and other expenses all declined as a percentage of sales on forex benefit, and lower depreciation from fully depreciated trucks.

Other income fell on lower grants.

  • Other income dropped to S$1.8m (-56% y-o-y) largely from lower government grants. Government grants was S$0.3m in 4Q18 vs S$2.6m in 4Q17 due to absence of grants received for productivity improvement projects and lower Special Employment grants.
  • The drop in non-operational income was the cause of lower y-o-y net profit margin (7.9%, -0.4ppt). Otherwise, net margins remained stable on a sequential basis.

Maintain BUY, Target Price S$1.25:

  • Our forecasts remain largely unchanged. We maintain BUY with S$1.25 Target Price, based on 25x FY19F PE.
  • Outlook remains positive as a total of 10 new opened stores in 2018 will enjoy a full 12 months of revenue contribution this year. Store expansion will continue especially in areas where it has no presence. A second store in Kunming is due to commence operations in 3Q19 as well.
  • We continue to like Sheng Siong Group for its defensive qualities including stable earnings, net cash balance sheet, cash generating abilities, and decent dividend yield. We see Sheng Siong Group as a prime takeover candidate due to its vast store network and logistics chain, especially if online players eventually decide to move offline through acquisitions.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.25 UP 1.240