Sheng Siong Group - UOB Kay Hian 2019-04-29: 1Q19 In Line; Secures Three New Stores

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SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - 1Q19: In Line; Secures Three New Stores

• SHENG SIONG GROUP LTD (SGX:OV8) posted a 1Q19 net profit of S$19.4m (+5.9% y-o-y) as new store sales ramped up, aided by Chinese New Year festivities.
• Net revenue grew 10.1% y-o-y, driven by contributions from new stores which were partially offset by a contraction in comparable SSS.
• Maintain HOLD with a PE-based target price of S$1.11. Entry price: S$1.00.

1Q19 RESULTS

Sheng Siong Group's 1Q19 results in line with expectations.

• SHENG SIONG GROUP LTD (SGX:OV8)’s results are in line with our estimates. Revenue rose 10.1% y-o-y in 1Q19, mainly attributable to new store sales.
• Gross margin dipped y-o-y to 26.1% (1Q18: 26.2%) as the improved sales mix was offset by slightly lower supplier rebates. Sequentially, gross margin declined from 27.1%, in line with seasonal trends as the group pushed for more volumes during the Chinese New Year season.
• The higher gross profit was partially offset by higher operating expenses due to six new stores opened between Apr 18 and Dec 18.

SSS contraction.

• In 1Q19, comparable same-store sales (SSS) contracted 1.0% y-o-y due to softer consumer sentiment and stiffer competition.

STOCK IMPACT

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.

China business broke even, opening second outlet in 2H19.

• The supermarket in in 1Q19 as revenue grew 0.5% y-o-y (1Q18: +0.8%). A second supermarket in Kunming is expected to be operational in 3Q19.

EARNINGS REVISION/RISK

• No revision to earnings forecasts.
• Risks include:
  1. price war between Amazon and RedMart which might trigger associated price reductions from brick-and-mortar players,
  2. irrational bidding for supermarket units, resulting in fewer new-store wins, and
  3. disruption to supply chain caused by trade tariffs.

VALUATION/RECOMMENDATION

• Maintain HOLD with a 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/ 2019-04-29

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.110 SAME 1.110