GPM holds up; bottomline held back by lease interest expenses

• Sheng Siong Group’s 2Q19 GPM grew sequentially to 27.4% (1Q19:26.1%). Admin costs were 17.9% of sales (2Q18:17.5%) as three stores were added in 2Q19 while higher bonus was also provided for.
• Interest expenses due to lease liabilities (with the adoption of SFRS 16 (I) Leases on 1 Jan 19) of S$0.5m also capped bottomline growth. Ex-lease costs 2Q19 net profit rose 12% y-o-y.
• 1H19 GPM was 26.7%, similar to 1H18’s. Gross profit increased by 10.9% y-o-y and net profit rose by 6.7% y-o-y in 1H19.

Bidding for six more stores

• Sheng Siong Group’s number of stores rose to 57 (512k sq feet) from 54 (496k sq ft) in 1Q19 post three stores opening in May 19. Management guided that it tendered for six more stores in 2Q and expects to know the outcome by end-Aug. We had previously assumed three new stores (15k sq ft) in FY19-20F. But a successful bid in Aug 19 could raise the store count and acreage above our assumptions for FY20F.
• We believe Sheng Siong Group has a good chance of winning at least 3-4 stores given its nearest competitor Giant is in consolidation mode.

Stable amidst the volatility

• We like that SSSG has improved. GPMs have also stabilised. We also think Sheng Siong Group could stay aggressive in new store bids to gain market share; this will provide a continual pipeline for new store revenue growth.
• Admin expenses to revenue ratio should moderate in FY20/21F as revenue trickles in from the new stores.
• We raise our FY19-21F EPS by 1-4.4%, on higher store acreage additions of 20k sq ft (vs. 15k sq ft previously) and higher GP margins.

Upgrade from Hold to ADD with a higher Target Price

• We think Sheng Siong Group will be rewarded for its healthy balance sheet (end-2Q19 net cash of S$82.8m) and ability to deliver earnings growth in this competitive climate.
• Sheng Siong Group announced an interim dividend of 1.75 Scts, but we think there could be a chance of higher final dividend should there be less need for significant capex moving ahead.
• We now base our Target Price on 22.5x CY20F P/E (close to 1 s.d. level of 22.2x [vs. 20.8x previously]) and have an ADD call for a total return of 12.3%.
• Upside/downside risks include higher/lower GPM, SSSG rates and dividends.