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

SHENG SIONG GROUP LTD (SGX:OV8)

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.

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.

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.

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.

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.

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.

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.

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 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.

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