• On 2 Jul, we hosted a conference call for Sheng Siong Group with funds from Singapore and Malaysia. 
• Consumer sentiment and supermarket tender pipeline are intact, which bodes well for same-store-sales growth and new store wins. 
• Cash preservation measures could ease after the completion of Sheng Siong Group’s distribution extension (est. end-FY18F), freeing cash flows for dividend payout, in our view. 
• We forecast 2Q18F/1H18 net profit grew to S$16.8m/S$35m (+4.3%/+5.5% y-o-y), accounting for 47.9% of our FY18F. Expect interim of DPS 1.63Scts (1H17: 1.55Scts). 
• We like the stock for the uplift in store wins in FY18F, strong balance sheet and operating cash flows. Maintain ADD and Target Price of S$1.18. 

Consumer Sentiment Intact

Sheng Siong Group said consumer sentiment, which saw recovery since 2H17, is unchanged. This is encouraging, as this bodes well for same-store-sales growth for FY18F, in our view.

In 1Q18, Sheng Siong Group’s same-store-sales growth was 5.6%, largely due to a recovery in consumer sentiment, with help from expansion of its Block 506 Tampines, a pick-up in sales from a re-opened Loyang store, and the migrating customers (from its closed Verge and Woodlands Block 6A) to Jalan Berseh and Woodlands Block 301 stores.

Tender Pipeline Still Robust

Sheng Siong Group reiterated that the pipeline for new stores is still promising given there are at least 10 bids available in FY18F. 

According to the Place2Lease website, YTD, Sheng Siong Group has two pending store bids (c.10k sf). If successful, the wins could take Sheng Siong Group’s number of stores beyond the 50-store target by end-FY18F, and beyond 6 new store openings in FY18F (just shy of the 8 store additions in FY12). It ended 1Q18 with 48 stores.

Stable Competitive Environment

During 2H16-1H17, Sheng Siong Group had no new store openings due to intense competitive environment led by irrational rental bids by its smaller peers. The competition eased in mid-FY17 and the bidding environment has remained rational thus far. We believe this is positive for Sheng Siong Group as it is generally reluctant to overbid for the sake of expanding. Hence, a rationale bidding environment improves Sheng Siong Group’s odds of winning store bids, in our view.

Capex Needs Could Ease Post FY18F

We believe FY17 dividend payout was lowered to 70% (vs. historical average of 90%) in anticipation of the S$16m capex required for the distribution centre extension (est. completion end-FY18) and the competitive FY17 environment. However, barring any special projects and if the consumer sentiment remains healthy, such cash preservation measures may ease post FY18F, which could lead to a higher dividend payout.

We forecast FY18-20F free-cash-flow yield of 4.6-5.8%. It was in a net cash position (5.2Scts) at end-1Q18.

2Q18F Preview

2Q is a historically a weaker quarter for Sheng Siong Group. We estimate 2Q18 revenue and net profit grew 5.3%/4.3% y-o-y to S$212.5m/S$16.8m (-7.0% q-o-q/-8.3% q-o-q) on 7 new stores and improvement in same-store-sales growth. GPMs are typically higher in 2Q, and we expect GPM rose to 26.6% (vs. 1Q18: 26.2%).

We expect 1H18 revenue and net profit to account for 49.9% and 47.9% of our full-year estimates, respectively.

We forecast an interim dividend of 1.63Scts (vs. 1H17: 1.55Scts), based on 70% payout.

Maintain ADD and Target Price of S$1.18

Sheng Siong Group currently trades below its historical 3-year mean of 20.9x forward P/E, despite potential store count growth in FY18F and strong balance sheet. Our Target Price is based on 22.2x FY19 EPS (1 s.d. above historical 3-year mean of 20.6x).

Catalysts/ downside risks include higher/ lower-than-expected same-store-sales growth, new store wins and GPMs.

Source: CGS-CIMB Research - 03 Jul 2018