• 4Q19 revenue met our estimates but PATMI missed due to higher operating expenses and taxes.
• Excluding IFRS(I) 16 accounting change, FY19 and 4Q19 PATMI grew by 9.3% and 8.4% YoY respectively.
• Multiple growth drivers intact for Sheng Siong in FY20e including store expansion, operating leverage, rebound in revenue per sqft and recovery in consumer sentiment.
• The supply chain impact from the Covid-19 appears manageable. Likely to see a healthy 1Q20e results following the spike in demand plus overall improving consumer sentiment. Our ACCUMULATE recommendation is maintained and target price raised to S$1.41 (previously S$1.32). We rolled-over our target price to FY20e earnings and 25x PE. Our FY20e earnings is lowered by 5% as we raise operating expense estimates.

The Positives

+ Same-store sales recovery. After four quarters of decline, 4Q19 organic growth (or same-store sales) for SSG rose 1.8% YoY. We observe a similar improvement in supermarket industry sales which returned to positive growth of 1.3% in 3Q19 after four quarters of decline since 3Q18. Consumer sentiment has been recovering.

+ Resilient gross margins. Gross margin has been consistently trending at the 27% level for the past three quarters. Higher sales of fresh products plus supply rebates are some of the margin drivers. Elevated pork prices due to the recent swine flu outbreak capped further upside in margins. Moving forward we expect only marginal improvements in gross margins. 

The Negative

– Distribution cost spiked and taxes jumped ahead of estimates. The large jump in distribution cost was due to higher depreciation due to enlarged fleet size to cater to the increased number of stores. Effective tax in the 4Q19 was almost 19%. There is typically huge variability in 4Q taxes due to final adjustments in computing allowances. FY19 effective tax was 17.6% (FY19: 16.7%)

Outlook

The Covid-19 impact on the supply chain has been muted. Apart from shortage in personal hygiene products (masks, sanitisers), supply of products were stable. Geographical diversification of products sourced should help keep supply stable. The recent “spike” in purchases will be positive for 1Q20. Another repercussion of the outbreak was the avoidance of public areas and shift towards eating at home and home-cooked meals. SSG could benefit from the recent amendments to the 2020 budget, which includes more than S$1mn in benefits through the 8% wage subsidy and half month HDB rental rebate. However, it is unclear how much property tax rebate will be returned to tenants.

We are positive on the outlook for SSG in FY20e. Some earnings drivers include:

• Store expansion is still underway: Sales in FY20e will be spurred by the expansion of new stores. Weighted average floor space grew by 5.2% from 508,250 sqft in 2019 to 534,780 sqft as at end-Jan20. SSG will attempt to secure more new stores by bidding on the four stores being bid out by HDB. Expansion opportunity for SSG presents itself in the form of new and existing sites re-tendered by HDB. Some competitors may look to consolidate their stores in Singapore.
• Signs of improving consumer sentimen: As mentioned above, there has been a noticeable improvement in consumer sentiment since 4Q19. This should lead to robust Chinese New Year sales in 1Q20 (especially due to weak comparable in 1Q19).
• Improvement in Sales per sqft as new store stabilise: Sales per sft declined by 2% from S$1956 to S$1916 in FY19 due to lower margins from new stores opened in FY18. We expect sales per sft to recover and drive overall revenue growth as newly opened stores stabilise.

Maintain ACCUMULATE with TP of S$1.41 (previously S$1.32).

Our TP is rolled over to FY20e earnings and multiple of 25x PE.  We see good earnings visibility for SSG. Growth will come from store expansion, consumer recovery and increase in sales productivity. SSG continues to gain market share in the supermarket industry from wet markets and incumbent operators (Figure 1).  Another attraction of SSG is the 2.7% dividend yield, 25% ROE and S$76mn net cash* balance sheet.

*Loans in our financials for SSG are lease liabilities

Source: Phillip Capital Research - 24 Feb 2020