Sheng Siong Group - DBS Research 2019-07-30: New Stores Driving Growth


Sheng Siong Group - New Stores Driving Growth

  • Sheng Siong Group's 2Q19 earnings in line, growth led by new stores.
  • Core margins largely stable while decline in net marginwas due to SFRS (I) 16 adoption.
  • Interim DPS of 1.75 Scts declared.
  • Maintain BUY, Target Price lifted to S$1.32.

Maintain BUY and Target Price S$1.32, growth led by new stores.

  • We maintain our BUY recommendation for Sheng Siong Group (SGX:OV8) for its earnings resilience and stability.
  • Growth continues to be led by new stores, with ten new stores opened in 2018 which will contribute for the full 12 months this year, and three new stores (Bukit Batok, Anchorvale and Sumang Lane) contributing from 2H19. A second store in Kunming, China has opened in June 2019.
  • Sheng Siong Group's dividend yield is decent at 3.5-3.6% with potential for a higher payout. See Sheng Siong Group's dividend history.

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 Alibaba’s Hema (盒马鲜生) and Amazon (Wholefoods) are taking the online-to-offline for higher dividend payout if there is excess cash on its books.

WHAT’S NEW - New stores driving growth

Earnings in line:

  • Sheng Siong's 2Q19 revenue of S$238m (+11.8% y-o-y), operating profit of S$20.4m (+7.3% y-o-y), and earnings of S$18.4m (+7.4% y-o-y) were in line with our expectations. Revenue growth was driven by new stores as same store sales (SSSG) was -0.3% and to S$1,921.
  • China operations are now profitable, despite opening of a second store in Kunming in June.
  • An interim dividend of 1.75 Scts was declared, equivalent to 70% payout rate.

Gross margins stable:

  • Gross margins remained stable at 27.4% (+0.1 ppt y-o-y). This was sequentially higher than 1Q19’s 26.1% due to the Chinese New Year sales period, where discounting and promotions lowered selling prices and margins. Sales mix of fresh products was higher, which led to the slightly higher margins.

Operating margins lower:

  • Sheng Siong's operating S$1.5m on higher headcount and fleet cost from higher sales volume.
  • Admin expenses higher store count.
  • Other expenses credit cards and other non-cash payments.

Outlook continues to be positive driven by new stores.

  • Earnings are tracking our estimates despite a slightly negative SSSG and decline in annual sales psf, with new stores continuing to drive revenue growth. Three new stores that were opened in May 2019 (Bukit Batok, Anchorvale and Sumang Lane) will add to 2H19 revenue, while there will be a full 12 months of contribution from a total of 10 stores that were opened in 2018.
  • Post adoption of SFRS (I) 16 in 2019, the accounting impact on 1H19 earnings was -S$1m. Net profit would have been 9.6% y-o-y higher in 1H19 at S$38.8m if the accounting impact was excluded. We estimate that net margin would have remained stable at about 8% as well.

Maintain BUY, Target Price S$1.32

  • We leave our line. We maintain BUY but raise our Target Price higher to S$1.32 Target Price, based on 25x FY20F PE, rolling over from FY19F earnings previously.
  • We continue to like the stock for its defensive qualities including stable earnings, net cash balance sheet, cash generating abilities, decent dividend yield.
  • Maintain BUY for 19% upside.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-07-30
SGX Stock Analyst Report BUY MAINTAIN BUY 1.32 UP 1.250