SHENG SIONG GROUP: Key Takeaways From Results Briefing

Excerpts from UOB Kay Hian report

VALUATION
• Sheng Siong is currently trading at consensus 2015F and 2016F PE of 23.4x and 21.7x respectively. This is in comparison to Dairy Farm International’s 20.9x and 19.1x.


FINANCIAL RESULTS
• 2Q15 net profit jumped 23% yoy as the group recorded higher revenue and improved gross profit margins from the shift in sales mix to fresh produce, better buying prices and efficiency gains from central distribution centre at Mandai.

• Balance sheet remained strong at a net cash position of S$131.7m (S$0.088/share). This coupled with a robust cash flow generation, has allowed Sheng Siong to increase its interim dividend by 16% yoy to S$0.0175.

INVESTMENT HIGHLIGHTS
• Sales from new stores drive revenue growth in 2Q15 as new stores accounted for 4% of the yoy increase. Sheng Siong opened a new store at Penjuru in Dec 14, and another 4 stores in 1H15, as retail area increased 6.5% yoy to 426,000 sq ft as at 30 Jun 15. Existing stores added only 0.3% to yoy revenue growth, reflecting weaker industry demand post Chinese New Year and intensifying competition from peers’ SG50 promotional offers.

• Improving efficiency. After the successful implementation of the self-checkout system in its Bukit Panjang Segar outlet, Sheng Siong is planning to roll out the self check out systems in 7 stores in the 2H15 and another 10 stores in 2016. The selfcheck out system is expected to reduce cashier manpower needs by 30% in each store, potentially driving future profitability.

• Online grocery - complementary business but not flying. While online grocery shopping is become a growing trend and an online platform would complement Sheng Siong (as it can be easily implemented with delivery trucks from Sheng Siong’s network of brick and mortar stores), the group is not seeing huge growth from the sales channel.

• Industry outlook. In reaction to the weak same-store sales growth, Sheng Siong is expected to renovate some of its old stores in matured housing estates in the coming quarters. Competition for new retail space is heated, which may affect the group’s ability to open new stores. In the near term, cost inflation, particularly from food inflation is likely to be restrained.

Full report here.