• Defensive business
• Slow but steady growth ahead
• Expects gross margin to stay stable

Resilient Business Model

In times of volatility given the trade tensions between U.S. and China as well as Europe, we believe Sheng Siong Group (SSG) offers certainty over its earnings outlook backed by a resilient business model. With nearly 100% exposure to Singapore (except for a new start-up store in China), and selling mainly consumer staples, we expect SSG’s business to be relatively unaffected by the on-going trade spat in other parts of the world. Note that its new store in Kunming, China, contributed 0.8ppt to 1Q18 total revenue growth, but recorded S$0.1m loss in 1Q18, which in our view, remains insignificant.

New Stores to Drive Growth Ahead

As highlighted previously, we expect the 5.6% same stores sales growth (SSSG) recorded in 1Q18 to be sustainable for FY18 due to several factors including:

1) expanded Tampines 506 store (10k sqft to 25k sqft) that only opened in Jun 17,

2) spillover of customers from closure of The Verge store to another nearby store at Jalan Berseh, as well as from closure of Woodlands 6A to other stores in Woodlands.

That said, without these one-off factors, we expect SSSG to normalize to ~2% from FY19 onwards. According to Euromonitor, grocery retailers in Singapore are forecasted to record a CAGR of 1.5% in sales for the period 2017-2022, which is in-line with our expectations. In addition, with healthy tender pipeline in FY18, we expect SSG to continue to bid rationally for new HDB stores in re-developed and new neighborhoods, as well as expand in HDB estates where SSG currently does not have presence in. While SSG offers unexciting growth, the defensive nature of its business model translates to stable cash flow, which is crucial amid uncertain global economic outlook.

Unchanged FV of S$1.12

On abovementioned reasons, we continue to like SSG for its resilient business model supported by strong cash flow generation and solid balance sheet. For now, we are keeping our FV estimate of S$1.12 unchanged.

Source: OCBC Research - 28 Jun 2018