Mixed views on Sheng Siong Group's near-term outlook amid aggressive store expansion

SINGAPORE (April 30): Brokers are split on their opinions of Sheng Siong Group (SSG) post the release of the supermarket operator’s 1Q19 results, which saw earnings growth of 5.9% to $19.4 million for the quarter ended March due to higher revenue.

While DBS Vickers Securities maintains “buy” on the stock with $1.25 price target, CGS-CIMB Research has downgraded its call to “hold” from “add” with a reduced target price of $1.10 from $1.22 previously.

UOB Kay Hian and Maybank Kim Eng are reiterating their “hold” and “sell” calls with price targets of $1.11 and 95 cents, respectively.

DBS analyst Alfie Yeo is the most positive on SSG as he believes the group’s growth will continue to be led by new stores, resulting in a dividend yield of 3.5-3.7% with the potential for a higher payout ahead.

At the same time, the analyst does not think the online grocery retail sector poses a serious threat to SSG for now, due to a different target customer base and large warehouse size.

“The online market is small currently, and will take time to gain share from brick-and-motar stores rather than ramp up rapidly,” notes Yeo.

“We believe that Sheng Siong, with its decent store network and logistics chain, could be a takeover target for online players eventually. Online players such as Alibaba’s Hema and Amazon (Wholefoods) are taking the online-to-offline route and are operating physical stores. We see scope for higher dividend payout if there is excess cash on its books,” he adds.

Meanwhile, CGS-CIMB analyst Cezzane See foresees lower earnings growth ahead for SSG due to the delay of the group’s distribution centre expansion. Apart from lower supplier rebates, this development could weigh on gross profit margin growth, in her view.

See has there cut FY19-21F earnings per share (EPS) by 3-4% on lower gross profit margins, and anticipates slightly lower revenue per-square-feet in FY20-21F.

The new target price of $1.10 is now based on 20.5 times CY20F P/E, which is close to the four-year historical mean of 20.8 times versus 22 times previously.

“While we still like SSG for its healthy balance sheet and its ability to maneuver the current competitive climate, we believe the moderate earnings growth could cap near-term share price movements, in our view. We opt to stay on the sidelines for now,” says See.

Likewise, UOB analyst Yeo Hai Wei remains positive on the group’s long-term growth prospects as it expands into young housing estates, although he believes net margins are likely to be affected by higher operating expenses in the near term.

For now, he recommends an entry price of $1.

“SSG remains in transition as it ramps up new-store sales… We will turn positive on the stock when new stores begin to show profitability,” he says.

Maybank analyst Sze Jia Min, however, sees the latest quarter’s new store sales are the only bright spot in SSG’s latest set of results, and points out how negative same-store sales (SSS) growth 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,” she observes.

With the group adopting the new accounting standard and recognising higher depreciation costs as well as interest expense as a result, Sze notes this translates to a “negative, but minimal” impact of $0.2 million in 1QFY19.

“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%,” says Sze.

As at 10.54am, shares in SSG are down by 1 cent at $1.03 or 4.95 times FY19E book value, according to Maybank estimates.