• Sheng Siong Group (SGX:OV8)’s 3Q19/9M19 core net profit rose 15.3%/9.5%, slightly ahead at 76.5%/76% of our/consensus’ FY19F forecasts (S$76.2m/S$76.8m).
• Other income was the main beat. But FY19F store count of 58 was also above our estimated 57 stores. We raise FY19-21F forecasts by 1-1.1%.
• We like Sheng Siong Group for its healthy balance sheet and steady earnings/store growth. Maintain our ADD call and raise Target Price to S$1.30 on FY21F EPS.

New Stores Still the Sales Growth Driver

• Sheng Siong Group’s 3Q revenue grew 11.4% on new store sales (10 in 2018 and 3 in 2Q19) growth of 10.4%, compensating for a same-store-sales contraction that steadied at -0.3% y-o-y (vs. 1Q19/2Q19: -1.0%/-0.3%). See Sheng Siong Announcements.
• 1H19 revenue grew 11.1%, again mainly on new stores revenue growth (+10.8% y-o-y).
• 3Q19 China supermarket revenue saw a slightly higher growth, rising 1.3% y-o-y and 0.8% y-o-y in 9M19.

3Q19/9M19 GPM Holds Up at 27.1%/26.8%

• 3Q19 GPM was 27.1%, sequentially lower vs. 2Q19’s 27.4% due to seasonality (in 3Q the supermarket typically push sales vs. margins) but ahead of 3Q18’s GPM of 26.5% on slightly higher fresh sales mix and lower input cost arising from higher suppliers’ rebates.
• 9M19 GPM was 26.8% (ahead of 9M18’s 26.6%), taking 9M19’s gross profit up 11.9% y-o-y.

Other Income a Bumper Surprise

• 3Q19 other income rose 61.3% y-o-y to S$2.9m, namely on government grants, taking 9M19 other income to S$7.2m (+23.8%), ahead of our FY19F other income estimate of S$7.0m.
• According to Sheng Siong Group, higher 3Q19 government grants were due to a subsidy received for a project. We raise our FY19F other income estimate to S$7.6m.

Store Count in FY19F Rises to 58

• Sheng Siong Group guided that it will end FY19F with 58 stores (520k sq feet), vs. 57 stores (512k sq ft) in 9M19. While this involves one store closing in Dec 19, it is still above our forecasted 57 store count for FY19F. Moreover, Sheng Siong Group guided that the closing outlet contributed less than 1% of the Group’s revenue for 9M19, hence, we believe the closure will have an immaterial effect on revenue.
• Beyond that, Sheng Siong Group guided it had also secured another store in 1Q20F, implying an end-1Q20F store count of 59 stores (524.8k sq ft).

Maintain ADD

• We raise our FY19-21F EPS by 1-1.1%, on higher other income and store acreage additions. We continue to like Sheng Siong Group for its stable margins, healthy balance sheet and continued ability to grow market share.
• We raise our Target Price (from S$1.25) as we roll forward to FY21F P/E still based on 22.5x CY20F P/E (close to 1 s.d. above its historical 3-year mean).
• Catalysts include more new stores, better SSSG and higher dividends.
• Downside risks are the reverse, including weak China investment returns.

Source: CGS-CIMB Research - 30 Oct 2019