• FY18 results within expectations
• Looking forward to new store rampups
• Total dividends of 3.4 S cents per share

Top-line and Gross Profit Growth Driven by Openings of New Stores

Sheng Siong Group's (SSG) results were within expectations. 4Q18 revenue increased 10.7% YoY to S$221.8m while gross profit grew 9.2% to S$60.2m. New stores contributed much of the top-line growth – the Group opened 10 new stores this year, increasing the total store count to 54 and growing total retail space 22.7% YoY to 496.2k sq ft. This is the most no. of stores the group has added annually in recent years.

Gross profit margin was up 0.6 ppt to 60.2%. 4Q18 PATMI increased 4.2% to S$17.5m. For FY18, PATMI grew 1.4% to S$70.8m, which made up 101% of our initial full-year forecast. Excluding a one-off positive in FY17 (a S$2.2m refund of prior years' taxes), SSG's FY18 net profit would have increased 4.6% instead of 1.4%.

Comparable SSSG Has Deteriorated Through the Quarters…

For FY18, comparable same store sales growth (SSSG) decreased 0.4 ppt YoY to 1.7%. For 4Q18, comparable SSSG dropped from 3.2% in 4Q17 to -2.7% in 4Q18. Recall that comparable SSSG (YoY) came in at +5.6% in 1Q18, +4.2% in 2Q18 and +0.2% YoY for 3Q18. Management highlighted that retail sales for supermarkets was challenging in 2H18 and that certain HDB stores faced stiff competition from other brickand-mortar stores in the vicinity.

Going forward, we are still wary that consumer spending could see some softness in 1Q19. The Ministry of Trade and Industry (MTI) has Singapore’s 2019 GDP forecast at between 1.5% and 3.5%, and expects that growth would likely be slightly below the range’s mid-point.

However, Continued Ramp-up of New Stores in 2019 to Help Operating Margins

That said, we still do expect top-line and operating margins to grow in 2019, as the 10 new stores that opened last year are given more time to stabilize. For instance, administrative expenses came to 17.3% of revenue in FY18, vs. 16.6% in FY17, and 16.7% in FY16. We believe that line item will normalize as a percentage of revenue as the top-line continues to grow. In addition, we are keeping an eye on the ongoing US-China trade talks which may boost general economic sentiments if there is a positive conclusion.

With regard to additional store expansions in 2019, the Group notes that there are six HDB shops which have been released for re-tender so far this year. After adjustments, our fair value increases from S$1.13 to S$1.19. We upgrade SSG from Hold to BUY.

Source: OCBC Research - 27 Feb 2019