Results at a glance

The Positive

+ Sales growth was healthy. 1Q19 sales growth of 10.1% YoY was above our modelled 7%. Growth was supported purely by the new stores as same-store sales contracted 1% YoY.

+ Three new stores secured. In May 2019, Sheng Siong secured 3 new stores (or 15,780 sft). This will boost total store footprint by 3%. These three stores are close-bid stores retendered from existing sites that were given up. Another six new stores have recently been tendered out by HDB. These stores may include non-price factors as part of the requirements.

The Negative

– Same-store sales a worry. As per the previous quarter, same-store sales is the weak spot. It contracted 1% during the quarter. This is comparable to the almost 2% same-store sales decline recorded by supermarkets located within retail malls*.

– Operating expenses trended higher. 1Q19 operating expenses was 17.7% of sales, marginally higher than our modelled 17.5%. New stores will require time to scale up. According to the company, gross margins were a tad lower due to the timing of rebates. Contribution of fresh products to the sales mix was in fact higher YoY in 1Q19.

*Using data from CapitaLand Mall Trust 1Q19 presentation as a proxy.

Outlook

In spite of the weak consumer sentiment, Sheng Siong has been raising their market share of supermarket sales. Supermarket sales in Singapore contracted almost 2% year-to-date, as at end-Feb 2019. Sheng Siong would have captured market share with their 10% jump in sales. We are still positive on the outlook. The almost 11% growth in retail space for 2019 will help support growth. Another growth driver will be the higher sales per square feet.

Upgrade to BUY with unchanged TP of S$1.30.

Our TP is based on an estimated 25x PE multiple. The company is expanding its store count, increasing market share and currently offers a 25% ROE with a S$87mn net cash balance sheet.