Sheng Siong Group's 1Q19 Revenue in Line, Due to New Stores

• SHENG SIONG GROUP LTD (SGX:OV8)’s 1Q19 revenue was in line with ours and within consensus’ expectations. Y-o-y earnings beat our estimates due to lower-than-expected increase in staff costs.
• Growth was supported by strong contribution from new stores’ sales but offset by negative SSS performance.
• We maintain our SELL, with unchanged DCF-based Target Price SGD 0.95 (WACC 7.8%, LTG 1%), which implies a FY19E PE of 18.9x, less than 1SD below its 5-year mean.
• While our revenue growth estimates remain unchanged, we adjust for better staff cost-control as management looks to roll out hybrid payment systems to all stores by the end of the year. On a net basis, we adjust our FY19 EPS up by 2.9%.

New Store Sales the Only Bright Spot

• The increase in revenue was mainly due to the 10 new stores’ performance (10.6%), but SSS (-1%) was a drag on overall growth. This drop in SSS has been noticeable since 3QFY18 and management has attributed the decrease due to shrinking basket sizes observed during Chinese New Year this year versus 2018, as well as cannibalisation of some existing stores, due to location proximity of new stores.
• Gross profit margin saw a fall of 0.1% y-o-y despite improved product mix, due to slightly lower supplier rebates.

Growth Outlook Remains Benign

• Management shared during the results briefing that while the first store in China broke even due to cost control, they are still addressing teething issues.
• Sheng Siong Group will be opening their second store in 2HFY19 while in Singapore, three new stores will be operational in 2QFY19. The number of stores and the growth in retail area is within our estimates for FY19.

Adoption of IFRS 16 for FY19

• Sheng Siong Group has adopted the new accounting standard for 1QFY19 and as a result, Sheng Siong Group started to recognise higher depreciation costs as well as interest expense. This translates to a negative, but minimal, impact of SGD0.2mil on 1QFY19 net profit.
• Risk to our SELL call includes higher-than-expected new stores & SSS contributions and any improved consumer sentiment.

Source: Maybank Kim Eng Research - 29 Apr 2019