Sheng Siong Group - UOB Kay Hian 2019-02-27: 4Q18 Results Below Expectations, Awaiting Ramp-Up In New Stores

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SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - 4Q18: Results Below Expectations, Awaiting Ramp-Up In New Stores

• Sheng Siong Group posted 2018 net profit of S$70.8m (+1.4% y-o-y), representing 97.8% of our expectations. 4Q18 net profit rose 4.2% y-o-y to S$17.5m. New stores drove revenue up by 10.7% y-o-y to S$221.8m but the increase was offset by higher operating expense (+7.4% y-o-y).
• Sheng Siong Group remains in transition as it ramps up sales at new stores.
• Maintain HOLD with a lower PE-based target price of S$1.11. Entry price: S$1.00.

4Q18 RESULTS

4Q18 results below expectations.

• SHENG SIONG GROUP LTD (SGX:OV8)’s results were below our estimates.
• Revenue rose 10.7% y-o-y in 4Q18, driven by sales at new stores. Gross margin slipped y-o-y to 27.1% (4Q17: 27.5%) due to a reclassification of S$1.5m from cost of sales to administrative expenses in 4Q17. Sequentially, gross margin rose from 26.5% in 3Q18 as the group pushed for more volumes to drive fresh produce sales.
• However, the solid revenue growth was undone by higher operating expenses which rose 7.4% y-o-y in tandem with new store openings and decline in other income (-55.7% y-o-y) due to lower government grants.

SSS contraction.

• In 4Q18, comparable same-store sales (SSS) contracted 2.7% y-o-y due to softer consumer sentiment and keener competition. Excluding growth in the Block 506 Tampines store which saw retail area expand by 15,000sf, comparable SSS would have decreased 3.3% y-o-y.

Final dividend of 1.75 S cents.

• Management proposed a final dividend of 1.75 S cents, bringing 2018 total dividend to 3.4 S cents (2017: 3.3 S cents), in line with the lower payout ratio of ~70% a year ago. This reflects management’s conservatism to build a larger cash buffer in the face of a more competitive environment.

STOCK IMPACT

Five new HDB outlets up for tender; irrational bidding out of sight.

• On the supply side, our channel checks at Place2Lease.com indicate only 5 new supermarket outlets that will be up for bidding.
• Management cited the tightening of supply for retail space by HDB as a factor to allay additional competition. In addition, the re-tendering of six HDB shops won by competitors also point to a more sensible bidding environment which can sustain margins going forward.

Nurture and expand Singapore business.

• Management remains committed to nurture the growth of new stores while also looking out for opportunities to expand into HDB estates where the group does not have a presence. Its warehouse expansion is expected to be delayed and completion is expected by 2Q19.

Still tinkering with China business.

• The supermarket in Kunming recorded losses of S$0.2m and S$0.7m in 4Q18 and 2018 respectively. A new lease for a second supermarket in Kunming has been signed and is expected to be operational in 3Q19.

EARNINGS REVISION/RISK

Adjust 2019-20 and introduce 2021 earnings forecasts.

• We reduce our 2019-20 Sheng Siong Group net profit forecasts to S$73.2m (-4.1%) and S$77.5m (-5.0%) respectively. We factor in gross margin of 26.8% and higher operating expenses as a result of new store openings.
• In addition, we roll-over 2021 earnings estimates of S$82.0m.
• Risks include:
  1. price war between Amazon and RedMart which might trigger associated price reductions from brick-and-mortar players; and
  2. irrational bidding for supermarket units, resulting in fewer new-store wins.

VALUATION/RECOMMENDATION

Maintain HOLD

• Maintain HOLD with a lower PE-based target price of S$1.11, pegged to peers’ average 2019F PE of 22.7x.
• Sheng Siong Group remains in transition as it ramps up new-store sales. While we believe in the positive long-term growth prospects of Sheng Siong Group as it expands into young housing estates, near-term net margins will likely be affected by higher operating expenses. We will turn positive on the stock when new stores begin to show profitability.
• Entry price is S$1.00.

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 | https://research.uobkayhian.com/ 2019-02-27

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.11 DOWN 1.150