• We deem Sheng Siong Group's 1Q19 net profit of S$19.4m slightly below expectations despite it being 24.6%/25.1% of our/street’s FY19F forecasts (S$78.6m/S$77m).
• GPM surprised and trended flat while same-store-sales growth was still in negative territory. We foresee earnings growth could be narrower in FY19F.
• We think the gestation period is holding back SSG’s earnings growth and this could cap share price movements.
• Downgrade to HOLD with Target Price of S$1.10.

New Store Sales Growth Continues; But SSG Still Negative

• SHENG SIONG GROUP LTD (SGX:OV8)'s 1Q19 revenue grew 10.1%, buoyed by new store sales growth of 10.6%. However, same-store-sales growth (SSSG) was still negative at -1.0%, albeit improving from 4Q18’s -2.6%. Its China supermarket saw a 0.5% y-o-y revenue growth.

GPM Flat; Bottom-line Held Back by Lease Interest Expenses

• Sheng Siong Group's 1Q19 GPM came in flat at 26.1% (vs. 1Q18: 26.2%); a first for SSG. While product mix tipped positively in favour of fresh food (i.e. higher margin items), this was offset by slightly lower supplier rebates in 1Q19.
• Admin costs moderated q-o-q to 16.8% of sales (4Q18: 17.8%; 1Q18: 16.8%). But new interest expenses due to lease liabilities (with the adoption of SFRS (I)16 Leases on 1 Jan 19) to the tune of S$0.4m reduced effective interest income, and moderated bottom-line growth.
• Sheng Siong Group still is debt free.

Three New Stores by May 19; Four More Open Bids for FY19F

• Three new stores are expected to be open in May 19 which will take Sheng Siong Group’s store count to 57 (from 54) and store acreage up by 15.8k square feet (to 511.9k sq feet). These stores were part of the batch of six stores released by HDB in a recent re-tendering exercise.
• As at Apr 19, HDB has slated 4 more scheduled open-bids in FY19F. We also understand there are more closed bids. We had already assumed a 15k sq ft increase in FY19F.

Lower Earnings Growth Ahead

• We note the completion of Sheng Siong Group’s distribution centre expansion has been delayed to end- FY19F (vs. 1Q19F), hence, apart from lower supplier rebates, this could also weigh on GP margin growth, in our view.
• We cut our FY19-21F EPS by 3-4% on lower GP margins of 26.8/27%/27% (vs. 27%/27.1%/27.1%) in FY19F/20F/21F, slightly lower rev/sq feet in FY20-21F and the introduction of lease interest costs.

Downgrade From Add to HOLD; Share Price Capped in Near-term

• While we still like Sheng Siong Group for its healthy balance sheet (end-1Q19 net cash position of S$86.3m; zero borrowings) and its ability to maneuver the current competitive climate, we believe the moderate earnings growth could cap near-term share price movements, in our view.
• We opt to stay on the sidelines for now and downgrade our call to HOLD and Target Price to S$1.10 now based on 20.5x CY20F P/E (close to 4-year historical mean of 20.8x vs. 22x previously).
• Upside/downside risks include higher/lower GPM, SSSG rates and dividends.

Source: CGS-CIMB Research - 29 Apr 2019