Sheng Siong Group: The worst is over February 26, 2018 3396

PSR Recommendation: BUY Status: Maintained
Target Price: SGD1.13
  • FY17 Revenue/PATMI were in line with our full year estimations
  • 11 new stores growth and improving macro backdrop to mitigate absence of contribution from the Verge and Woodlands Blk 6A
  • Declared final dividend of 1.75 cents per share (Full year dividend of 3.30 cents, or 71.1% payout ratio in FY17)
  • Maintain BUY and TP at S$1.13

Results at a glance

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The Positive

  • Consumer sentiment picked up in 2H17 and to extend into 2018 on the back of brighter economic prospect and a delay in GST hike. Same-store-sales growth (SSSG), excluding contributions from Loyang, Verge and Woodlands Blk 6A stores, improved from FY16’s 0.2% to 0.5% in 1H17 and 3% in 2H17. Overall SSSG was at 2.1% in FY17. Fewer and late store openings (opened 1 in Aug-17, and 2 in end-17) contributed to slower new stores growth in FY17 at 4.5% vs 6.2% a year ago.

In FY18e, we would see the full impact from the closure of the Verge and Woodlands Blk 6A stores, which contributed 5.3% to FY17 Revenue. Nonetheless, improving consumer sentiment coupled with expanded store count should mitigate the negative shortfall. We think 1Q18 should be a strong start, owing to seasonality – there is a 2-weeks window shift in 2018 Chinese New Year (Feb-18 vs Jan-17).

  • Gross margin continued to improve; sustainable at c.26% in FY18e. Margin drivers remain intact: efficiency gains derived from the central distribution centre, favourable input prices (still a buyer’s market for groceries), as well as higher Fresh products penetration rate (44% of FY17 Revenue, +1% point from FY16’s).
  • Strong financial position with zero debt and cash position of S$73.4mn as at end-FY17. Free cash flow turned positive from -S$11.2mn to S$60.9mn in FY17. We believe that the Group’s free cash flow should improve further in FY18, as (a) set up costs of Kunming store in China has incurred in FY17; and (b) absence of huge ticket purchase in FY18 (such as FY16’s S$89.9mn purchases of retail space).

After accounting for S$31mn FY18e CapEx (including S$16mn for the construction of central warehouse, and the remaining being new stores’ fitting costs and maintenance CapEx), we expect FY18e free cash flow to be S$65.6mn. Growing free cash flows could be a prelude to a higher dividend payout in future. Meanwhile, the expansion to the warehouse is on-track to be completed by FY18, adding c.97k sqft of storage area.

The Negative

  • Gestation of Kunming store could take time. Its first flagship store in China has soft-launched in Nov-17 but may take a longer period to breakeven. Including pre-operating costs, the Group’s share of the losses was S$0.4m in FY17 and could increase up to S$1mn in FY18e.

Outlook

Outlook remains positive. Tailwinds from favourable macro backdrop:

  1. Inflation to remain benign and stronger confidence to spur consumer spending.
  2. Government grants to support bottom line. FY18e Other Income to be comparable to FY17’s S$10.3mn. The recent 2018 Singapore Budget has extended the Wage Credit Scheme (WCS) to 2020, though the level of co-funding will be tapered. It will provide co-funding of 20% for 2018 (same as 2017), 15% for 2019 and 10% for 2020. On the other hand, it has obtained approval for S$1mn productivity grant YTD, (37% of FY17’s S$2.7mn).
  3. 11 new stores continue to underpin FY18e growth. 7 new stores opened in 2016-17, together with the 4 new HDB stores gained from the recent bidding exercise would mitigate the closure of two big The 4 new stores will increase net retail area by 7.9% by Apr-18 as compared to end-FY17 (see Figure 2).

Maintained Buy with TP at S$1.13. We kept dividend payout for FY18e to c.70%, an implied dividend yield of 3.7%.

Re-rating catalysts: (i) Successful bidding of new stores; and (ii) Improvement of product mix.

Healthy pipeline of new stores up for bidding in 2018. There are 13 new supermarkets units pending completion by 2018, according to data on HDB HBiz website. However, management shared its concern on the proximity of these locations with existing stores, which include those under Sheng Siong’s brand.

Figure 2: 11 new stores to underpin FY18e growth

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About the author

Profile photo of Soh Lin Sin

Soh Lin Sin
Investment Analyst
Phillip Securities Research Pte Ltd

Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.

She graduated with a Bachelor of Science in Mathematics and Economics from NTU.

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