Sheng Siong Group - Phillip Securities 2019-12-16: Expect Another Year Of Earnings Growth

SHENG SIONG GROUP LTD (SGX:OV8) | SGinvestors.io SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - Expect Another Year Of Earnings Growth

  • Store footprint expanding 8% in FY19/20 is supportive for revenue.
  • Growing 10x faster than industry due to market share gains from supermarket malls and wet markets.
  • Maintain ACCUMULATE with an unchanged target price at S$1.32.



Sheng Siong Group - Background



Sheng Siong Group - 2020 Investment Merits/ Outlook


Store footprint still growing.

  • After the record expansion of 10 new stores in 2018, we are expecting another 8% rise in footprint for FY19/20. This will provide support for revenue growth. The rise in construction of HDB units has improved on the availability of new shops.

Rising gross margins is an impressive trend.

  • Gross margins for Sheng Siong Group remains at record levels of around 27%. This is a major improvement from the 22% at IPO in 2011. Fresh food is the highest margin category, as high as 35%. As Sheng Siong Group captures share from wet markets, we expect the sales mix from fresh food to continue expanding. Anecdotally, there are a fewer hawker centres being built together with wet markets. Sales mix from fresh has risen from mid-30% to high 40%.

Operational leverage could surprise on the upside.

  • In the initial years, operating margins for new stores will be negatively affected by the high fixed cost from rental and labour. We expect operating leverage to turn positive in FY20e when FY18 new stores mature. In general, we believe it takes one to two years for a store to break-even.

E-commerce not encroaching into the mass market.

  • The impact of online has been relatively muted. Customers are still less willing to buy fresh foods online. Online sales for Sheng Siong Group is a very low single-digit percentage of sales.

Attractive metrics.

  • Sheng Siong Group offers attractive investment metrics with ROE of 25% and a net cash balance sheet of S$83mn. It also pays a dividend yield of 3%.

China still a learning process.

  • Sheng Siong Group started their first store in Kunming, China in November 2017. The second store opened in June 2019. Sheng Siong Group is taking a long-term view on China to be better understand the market and develop a brand name before rolling out more stores. Gross margins are lower in China but this can be offset by lower operating cost and capital expenditure.


Recommendation

  • Maintain ACCUMULATE with an unchanged target price of S$1.32 based on 25x PE FY19e. See Sheng Siong Target Price; Sheng Siong Analyst Reports.
  • Growth will come from:
    • 8% rise in store footprint in FY19/20e;
    • market share gains from supermarket malls and wet markets; and
    • increased productivity or revenue per sft for the stores.





Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2019-12-16
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.320 SAME 1.320



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