Sheng Siong Group: Two new stores in 2H17; Cutting dividends for growth July 28, 2017 1565

PSR Recommendation: ACCUMULATE Status: Maintained
Target Price: 1.06
  • 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


  • 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


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About the author

Profile photo of Soh Lin Sin

Soh Lin Sin
Investment Analyst
Phillip Securities Research Pte Ltd

Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.

She graduated with a Bachelor of Science in Mathematics and Economics from NTU.

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