Sheng Siong Group - DBS Research 2019-04-29: Powering Ahead


Sheng Siong Group - Powering Ahead

  • Sheng Siong Group's 1Q19 in line; growth driven by new stores.
  • Margins remained largely stable.
  • Minimum of four new outlets to open and supplement growth.
  • Maintain BUY and S$1.25 Target Price.

Maintain BUY and Target Price S$1.25; new stores driving growth.

  • We maintain our BUY recommendation for SHENG SIONG GROUP LTD (SGX:OV8).
  • Growth will continue to be led by new stores. Ten new stores opened in 2018, and these will contribute for the full 12 months this year, while three new stores (Bukit Batok, Anchorvale and Sumang Lane) will contribute from 2Q19. A second store in Kunming, China will also open in 2H19.
  • Dividend yield based on the current share price is decent at 3.5-3.7% with potential for a higher payout.

Where We Differ:

  • We do not think online grocery retail will pose a serious threat to Sheng Siong Group 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 (盒马鲜生) 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 - 1Q19 results in line

Earnings in line:

  • Sheng Siong's 1Q19 earnings of S$19.4m (+5.9% y-o-y) and revenue of S$251m (+10.1% y-o-y) were in line with our expectations. Operating profit of S$21m (7.9% y-o-y) was also in line.
  • Revenue growth was driven by new stores as same store sales (SSSG) was -1%. Sales per square foot was S$2,027 (-10.3% y-o-y).
  • China operations broke even in 1Q19 and recorded SSSG of +0.5% y-o-y.

Gross margins stable:

  • Gross margins remained stable at 26.1% (-0.1 ppt y-o-y). This was sequentially lower than 4Q’s 27% due to the Chinese New Year sales period, where discounting and promotions lowered selling prices and margins. Sales mix of fresh products was higher, but better margins was offset by lower supplier rebates.

Operating expenses remained stable:

  • Operating expenses increased by 10.5% y-o-y to S$44.6m, but was largely stable at 17.8% of sales. Distribution expense increased by 19% y-o-y to S$1.8m, while admin expenses increased by 10% y-o-y to S$42.2m.
  • Other expenses remained stable at S$0.6m; the increase from higher staff costs, depreciation, utilities, higher bonus provision were offset by lower rental expenses.

Adopted FRS (I) 16:

  • Sheng Siong adopted SFRS (I) 16 in 1Q19 and this led to S$0.2m negative impact on net profit. The new FRS116 generally capitalises leases and rentals, instead of accounting these as operating expenses. The value of leases would be accounted on the balance sheet as “right of use assets” and depreciation would be higher as a result.
  • The general net impact on P&L is higher depreciation, offset by the absence of rent expense.

Maintain BUY, Target Price S$1.25:

  • As 1Q19 results are on track to meet our estimates, our forecast is largely unchanged. We maintain BUY with S$1.25 Target Price, based on 25x FY19F PE.
  • Sheng Siong’s outlook remains positive as there will be a full 12 months of revenue contribution from a total of 10 stores that were opened in 2018. Three newly secured stores (Bukit Batok, Anchorvale and Sumang Lane) will also start contributing from 2Q19. We continue to like the stock for its defensive qualities including stable earnings, net cash balance sheet, cash generating abilities, and decent dividend yield.
  • Maintain BUY for 20% upside.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 1.250 SAME 1.250