• 3Q results within expectations
• Weak cons. sentiment & keen competition
• But less susceptible to e-commerce…?

3Q Core PATMI Up 1.5% YoY

Sheng Siong Group’s (SSG) 3Q results were within expectations with core PATMI increasing 1.5% YoY to S$17.7m or 24% of our initial fullyear forecast. Revenue grew 8.0% YoY to S$227.9m – 10.6 ppt from new stores, 0.2 ppt from comparable same store sales, 1.2 ppt from the China store, offset by -4.0 ppt from the closure of The Verge and Woodlands Block 6A.

Gross profit increased 10.7% YoY to S$60.3m. 3Q18 administrative expenses grew more-thanproportionally, up 16.6% YoY, due to the opening of ten new stores in 2017 and 2018. As a result, operating profit margin came in at 9.1% (down 0.9 ppt YoY).

Softened Consumer Sentiment and Keen Competition

Management notes that consumer sentiment appears to have deteriorated in the last few months and expects competition to remain keen. Recall that same store sales growth was +5.6% YoY in 1Q18, +4.2% YoY in 2Q18 and +0.2% YoY this quarter.

We believe the slowdown in SSG’s revenue growth was more a factor of a decrease in footfall as opposed to smaller basket size. Management noted that the laggards in their portfolio were particular stores in HDB estates where competitors have opened up shops nearby.

How Big Is the E-commerce Threat?

Given the currently small market share of online grocers, it has been difficult to observe the impact of their expansion on brick-and-mortar operators like Sheng Siong. According to estimates by the Institute of Grocery Distribution, the market share of online grocery in Singapore stood at 2.5% in 2017 and is expected to increase to 7.8% in 2022 at a 29.0% CAGR.

We expect that online grocery sales will likely eat first into the market share of stores located in malls (or at hard-to-get-to locations), as opposed to stores located within HDB estates. In this regard, we believe Sheng Siong is less susceptible than some of its peers.

However, in light of softening consumer sentiment and keen competition, we apply a more conservative terminal growth rate of 1.5% (vs. 2.0% previously) and our fair value drops from S$1.25 to S$1.13.

YTD, SSG has clocked total returns of 21%, outperforming the STI by 29 ppt. As at 31 Oct’s close, SSG is trading at 20.2x blended forward P/E (Bloomberg consensus), near its five-year mean of 20.7x. We downgrade SSG from Buy to HOLD.

Source: OCBC Research - 1 Nov 2018