• 3Q19 revenue was within our expectations. Net earnings exceeded our estimates due to better gross margins and other income (grants). New stores drove revenue growth of 11% in 3Q19 and gross margins were better than expected due to higher fresh food sales mix.
• Sheng Siong (SSG) secured another three new stores in for 4Q19/1Q20. The cumulative six new stores will expand footprint by 8% and support revenue growth in FY20e.
• We bumped up our FY19e earnings by 2% due to higher margins and other income. Our ACCUMULATE recommendation is maintained. Together with the rise in FY19e earnings, our target price is raised to S$1.32 (previously S1.30). New stores, market share gains and higher margins are translating to record earnings for SSG despite sluggish consumer spending in Singapore.

The Positives

+ Sales growth trending at 11%. 3Q19 sales growth of 11.4% YoY was above our expectations of 10%. Sales supported by the 17% rise in store footprint to 502,000 sft (weighted average). Supermarket sales in Singapore were only up 1.7% QTD Aug19. At 10.2% growth (Singapore only), SSG is expanding multiple times faster than the industry.

+ Gross margins sustained at record levels. Fresh produce sales are growing faster than groceries thereby boosting margins. SSG is taking share away from wet markets.  Wet markets are facing difficulties in recruiting manpower and is suffering from lower bargaining power within the supply chain.

The Negative

– Administration costs elevated due to new stores. The flipside of new stores is the initial fixed cost from staff and rental. As a percentage of sales, the administrative expenses were 17.3% in 3Q19.  We expect these cost to taper off as the stores mature. Administration cost converges at 16.5% of sales (FY14-17) at maturity. On a separate note, a store in Thomson that accounts for less than 1% of sales is expected to close in December 2019.

Outlook

The outlook for SSG is positive. The sources of earnings growth for SSG in FY20e include: (i) store footprint growing another 8% in FY20e; (ii) gross margins creep up as fresh produce market share increase (over traditional wet markets); (iii) modest recovery underway in industry supermarket sales; (iv) improvement in revenue per sft to around S$2,000 as stores mature (currently at annualised S$1,960); (v) operating leverage as sales build up.

Maintain ACCUMULATE with TP of S$1.32 (previously S$1.30).

Our TP is based on a multiple of 25x PE F1Y9e. SSG is riding on stable growth and improving market share in Singapore. Another attraction is the 3.2% dividend yield, 25% ROE and S$83mn net cash balance sheet.