• Reiterate BUY on our Top Pick, Sheng Siong , with a Target Price of SGD1.32, 16% upside and 4% yield.
• Sheng Siong recorded a strong 3Q19 PATMI of SGD20.6m, up 15% y-o-y and above consensus’ expectation.
• Sheng Siong also secured three new stores in the previous HDB tender, two of which were opened during October and one to be opened in 1Q20. We estimate a good performance in FY20F as the five stores which opened in 2019 would continue to fuel earnings growth next year.

Earnings Growth Largely Led by Stronger Revenue

• SHENG SIONG GROUP (SGX:OV8)'s 3Q19 revenue grew 11% y-o-y to SGD254m mainly driven by the maturing of its 10 stores opened in 2018 and three new stores in 2Q19.
• Same-store-sales-growth (SSSG) however remained negative at -0.3%. Gross margin expanded 0.6ppt to 27.1% on the back of a higher sales mix in fresh and suppliers’ rebates. Other income was SGD1.0m more than last year’s due to a subsidy received for a project. See Sheng Siong Announcements.
• Excluding the additional SGD1.0m in other income, 3Q19 results were in line with our expectation.

Change in Store Count

• Sheng Siong secured three new stores in the recent Housing Development Board (HDB) tender, of which two were opened this month and one is expected to open in 1Q20.
• Sheng Siong would be closing one of its outlets as its lease ends in December and according to the group, the shop has a retail space of 10,000sqft. Thankfully, we do not think the impact would be too significant as it only contributed < 1% to the group’s 9M19 revenue.
• The three new stores and the closure of one would bring Sheng Siong’s total store count to 59 in Singapore and two in China in 1Q20. Currently, we conservatively forecast the group to open two additional stores in FY20F.

Still a Bargain

• Sheng Siong's share price has come off from its peak in early September. We see potential for a share price recovery amidst a strong set of results. Moreover, Sheng Siong is now trading at a 20.2x FY20F P/E, still a discount to its peer’s, Dairy Farm International (SGX:D01) (21x FY20F P/E) which could see earnings deterioration as a result of its exposure to the Hong Kong market.
• Sheng Siong also offers a decent yield of 4% at its current price.

Source: RHB Invest Research - 31 Oct 2019