• 1HFY17 Revenue/PATMI met 50%/48% of our full year FY2017 expectations
• Retail landscape showed signs of weak recovery; Mature stores registered slight growth after six consecutive contractionary quarters
• Lower dividend payout of 70% in 1H17 as compared to 90% previously

The positives

+ Improved consumer’s sentiment in 2Q17: Mature stores registered slight growth of 0.9% YoY in 2Q17 after a contractionary 2H16 and a flattish 1Q17. Excluding the drag from Woodlands 6A store, which was impacted by the impending en-bloc activity, same store sales growth (‘SSSG’) would be 1.7% YoY. Woodlands 6A store will be closed in Oct-17.

+ Margin expansion drivers remained intact: Gross margins improved 50 bps on (i) lower input prices; (ii) improvement of product mix with sales of higher-margin fresh products; and (iii) increase bulk handling.

The negatives

– Lower dividend payout: The Group does not have a fixed dividend policy and its war chest of S$26mn* could be deployed to expand by another 4 stores.

* Cash and cash equivalents of S$69.3mn as at end-Jun17, less 1H17 dividend payout of S$23.3mn and S$20mn construction cost for the new extension to the distribution centre

Outlook

• Retail sales showed signs of recovery but weakness remained. While Singapore’s economic growth for 2017 is likely to grow above last year’s 2%, sale of supermarkets remained sluggish. We remained optimistic on Singapore’s retail outlook on the back of better economy prospect and growing household net worth.
• Better sales per retail area. Closure of two underperforming stores and two new stores opening in 3QFY17 should lift FY18e performance.
• We reaffirm FY17e gross margin to steady at c.26% in view of its continuous margin expansion initiatives amidst a benign inflation. 1H17 gross margin was at 25.8%
• Competition remains intense notwithstanding the threat from a new e-commerce entrant. With Amazon Prime Now joining the party, there could be a potential price war triggered by the two major online groceries retailers, i.e. Redmart and Amazon Prime Now. Nonetheless, the Group will not pursue on an aggressive expansion in its e-commerce operation. Instead, it will continue to focus on strengthening its fresh product offerings, where its competitive moat remains.
• New stores to underpin topline. We expect the five new stores opened in 2016, particularly the Yishun Junction 9 store, to provide support to FY17e topline growth. However, a lower number of new store openings in 2017 wold limit FY18e sales growth. There were no new stores opened in 1H17. YTD, we expect four stores, namely the Yishun Junction 9 store (Sep-16), the newly renovated and bigger store at Tampines Central store (Jun-17) as well as two new stores in Bukit Panjang (to be opened in Sep-17) and Woodlands (to be opened in Oct-17), to boost FY18e sales growth.
• Healthy pipeline of new stores up for bidding. There are 12 new supermarkets units pending completion by Dec-17 according to data on HDB HBiz website. However, management shared its concern on the proximity of these locations with its existing stores.

Maintained ‘Accumulate’ rating and TP of S$1.06, based on unchanged 4.61 cents FY17e EPS and 23x PE multiple

Nonetheless, we adjusted FY18e PATMI 2% downwards on (i) lower revenue due to lack of growth drivers; and (ii) lower other income due to the absence of government grants from Wage Credit Scheme. We also cut our dividend payout for FY17-18e to 70%, which gives an implied dividend yield of 3.4% and 3.5% respectively.

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

Figure 1: Changes in Retail Space/ Business Area

SSG is currently trading at 22.6x trailing PER, which is below its regional peers’ average of 34.5x.

It also provides an attractive FY17e dividend yield of 3.4%, as compared to its regional peers’ average of 1.9%.

Figure 2: Peers comparison