• 3Q16 net profit up 8.2% YoY
• New stores supporting growth
• Yishun Junction 9 (YJ9) store opened in Sep

Still facing a sluggish environment

Sheng Siong Group’s 3Q16 results met our expectations. For 9M16, revenue of S$599.7m and net profit of S$47.3m formed 74-75% of our full year estimates. 3Q16 revenue was marginally up 1.2% YoY to S$202.4m, driven by new stores growth of 5.3% but offset by a total contraction of 4.1% from the temporary closure of the Loyang Point store (-2.95%) and weaker comparable same store sales growth (-1.15%).

Recall that the Loyang Point store was temporarily closed on 15 Apr this year. Moreover, the broader retail environment has been sluggish, and this year’s festive sales during Chinese New Year (1Q) and Chinese Seventh Month Festival (3Q) had been unexciting.

Bottomline helped by higher gross profits

During the quarter, the group had received higher rebates for volume, display and for the provision of bulk handling services on behalf of the suppliers. This resulted in a 7.8% increase in gross profit, and gross profit margin improved 1.6ppt to 25.9%. Other cost items such as administrative expenses were generally maintained as a percentage of sales. Overall net profit for 3Q16 improved by 8.2% to S$15.7m.

Maintain BUY

We believe the nine new stores which had opened since 2015 would continue to be the main growth drivers. Looking ahead, the previously mentioned Loyang Point store is slated to reopen in 1Q17. The store at Block 506 Tampines Central (9.8k sq ft) will be closed temporarily in Mar-17 and re-open with ~25k sq ft in May-17. Besides the closure of the 41.5k sq ft Woodlands store in Jun-17, there is the potential closure of The Verge store next year following news of the sale of the mall.

Separately, the expected opening of the supermarket in Kunming, China has been delayed to 2Q17. All considered, we made minor changes to our forecasts while our DCF-derived fair value estimate is kept at S$1.15. Maintain BUY given the group’s defensive business, net cash position of S$46m as of 30 Sep-16 and decent yield of ~3.6%.

Source: OCBC Research - 27 Oct 2016