• 3Q15 earnings in line, driven by new stores
• Store expansion on track, margins set to improve going forward, long-term drivers intact
• Maintain BUY and S$1.01 TP
3Q15 results in line. Earnings of S$14.4m (+19% y-o-y) were in line with our expectations, driven by revenue growth and margin expansion. The strong revenue growth (S$200m, +7.3% y-o-y) was backed by SSSG of +1.1% and new store contribution of +6.2%. Margins were better than 3Q14 on gross margin expansion and lower opex. However, both gross and EBIT margins were sequentially lower mainly due to lower pricing for SG50 and seventh month festival promotions.
Input prices were also a tad higher as
1) deliveries for fresh food were disrupted due to the haze, and
2) to some extent, a stronger USD. Otherwise, opex as a percentage of sales was both lower sequentially and compared to 3Q14.
On track for store expansion, margins to improve going forward, longer-term drivers continue to develop. Sheng Siong has secured another store in Dawson (4,300 sqft) and will have a total of 39 stores by year-end. This is in line with our expectations. The target is to reach 50 stores in Singapore eventually.
We see margins normalising going into 4Q15.
1) Input prices for fresh food should ease as logistical disruption and the haze clears up;
2) pricing should be less aggressive post SG50 and seventh month promotions.
Online initiative remains in the pilot phase. We continue to see online sales for grocery retail in its infancy in Singapore and therefore believe Sheng Siong can afford to develop this business over a longer time frame. Developments in China continue to be on securing suitable sites in Kunming. As the grocery retail scene in China is facing intensifying competition, especially from online channels, we also believe time is on Sheng Siong’s side to land the ideal location.
Our target price for Sheng Siong is S$1.01 based on 25x FY16F PE. Valuation is pegged to below +1SD of its historical mean and below regional peers' average of 27x PE.
Revenue growth limited by store openings. Store expansion in Singapore is largely dependent on the supply of new supermarket retail space released by HDB and its ability to secure the tenders.
Excessive discounts and promotions may erode margins. Heavier discounts and promotions vis-a-vis competitors would drive sales revenue, but this could be gained at the expense of margins. (Read Report)
Read Related Reports
1) Sheng Siong Group - Another One on the List by Maybank Kim Eng Research, published on 23 October 2015
2) Sheng Siong Group - Bumper year for new stores by CIMB Research, published on 22 October 2015
3) Sheng Siong Group - Softer-than-expected trends by Daiwa Capital Markets, published on 22 October 2015
4) Sheng Siong Group - 3Q15: Strong earnings growth momentum continues but GP trend slightly concerning by JP Morgan Asia Pacific Equity Markets, published on 22 October 2015
Source : DBS Group Research