+ Revenue was strong from new stores and SSSG. Sales expanded 5.7% YoY in 2Q18 and is trending modestly faster than our modelled 5% rise. Interestingly the weighted average retail area in 2Q18 actually fell 1.3% YoY to 436k sft. However, this was made up by higher sales productivity per store. Same-store sales was around 4.5% in 2Q18. This is much better than the industry supermarket sales of 1% to 3% reported in Apr/May18.
+ Gross margins at a record. Gross margins touched 27.5% in 2Q18. This is a record for any June quarter. A year ago, gross margins were 26.6%. Improvement in margins came from a higher contribution of fresh product sales, to above 45% of total sales. Many more stores have exceeded 50% of total sales from fresh Because fresh products have limited shelf life, it is the most challenging product category to manage for any supermarket.
– Some of the gains in gross profits offset by opex. Operating expenses rose 10% YoY in 2Q18. This shaved off some of the gains in gross profits. The rollout of new stores raised fixed cost such as rental and labour whilst revenue is only beginning to trickle in. Admin cost to sales is typically 16-16.5% of sales but rose to 17.5% in 2Q18.
The outlook remains positive. Revenue will be supported by the new store openings (four in 1Q18 and two in 2Q18). Organic sales growth stems from improving consumer sentiment plus market share gains from both supermarket based malls and wet-markets. The e-commerce impact for Sheng Siong comes from bulky products such as diapers, beer, etc. Gross margins has further room to improve as more stores raise their fresh product sales mix. Fresh products margins are around 34%. The company has only 1 store in Kunming China but will need in order to test and build their brand.
Maintain Accumulate with unchanged TP at S$1.13. Our TP is based on an estimated 4.92 cents FY18e EPS and 23x PE multiple. We like Sheng Siong for its attractive financials, with a net cash position of S$75mn and ROEs of 26%. The company has a leading market position in supermarkets with its value branding and pricing. It is expanding market share through fresh products, more stores and consistent execution.