+ Same-store sales recovery. After four quarters of decline, 4Q19 organic growth (or same-store sales) for SSG rose 1.8% YoY. We observe a similar improvement in supermarket industry sales which returned to positive growth of 1.3% in 3Q19 after four quarters of decline since 3Q18. Consumer sentiment has been recovering.
+ Resilient gross margins. Gross margin has been consistently trending at the 27% level for the past three quarters. Higher sales of fresh products plus supply rebates are some of the margin drivers. Elevated pork prices due to the recent swine flu outbreak capped further upside in margins. Moving forward we expect only marginal improvements in gross margins.
– Distribution cost spiked and taxes jumped ahead of estimates. The large jump in distribution cost was due to higher depreciation due to enlarged fleet size to cater to the increased number of stores. Effective tax in the 4Q19 was almost 19%. There is typically huge variability in 4Q taxes due to final adjustments in computing allowances. FY19 effective tax was 17.6% (FY19: 16.7%)
The Covid-19 impact on the supply chain has been muted. Apart from shortage in personal hygiene products (masks, sanitisers), supply of products were stable. Geographical diversification of products sourced should help keep supply stable. The recent “spike” in purchases will be positive for 1Q20. Another repercussion of the outbreak was the avoidance of public areas and shift towards eating at home and home-cooked meals. SSG could benefit from the recent amendments to the 2020 budget, which includes more than S$1mn in benefits through the 8% wage subsidy and half month HDB rental rebate. However, it is unclear how much property tax rebate will be returned to tenants.
We are positive on the outlook for SSG in FY20e. Some earnings drivers include:
Maintain ACCUMULATE with TP of S$1.41 (previously S$1.32).
Our TP is rolled over to FY20e earnings and multiple of 25x PE. We see good earnings visibility for SSG. Growth will come from store expansion, consumer recovery and increase in sales productivity. SSG continues to gain market share in the supermarket industry from wet markets and incumbent operators (Figure 1). Another attraction of SSG is the 2.7% dividend yield, 25% ROE and S$76mn net cash* balance sheet.
*Loans in our financials for SSG are lease liabilities