Friday, April 29, 2016

Sheng Siong Group - Wage credits were the icing on the cake

Growth primarily driven by maturing of new stores 
1Q16 revenue (+5.1% yoy) reflected the gradual gestation of new stores opened in 2015 (+5.6%), offset by a 0.5% contraction in SSSG. Over 2015, Sheng Siong added five stores (Punggol, Tampines, Dawson, Bukit Panjang, Pasir Ris) of which among the five, Dawson and Pasir Ris still have some distance to reach optimum sales level. Guidance of 5-6% sales growth in 2016, propelled by new stores, remained unchanged.     

Weak environment shows up in flat same-store-sales growth…
1Q and 3Q are traditional festive periods that have an element of discretionary spending. Weak SSSG was reflective of a pullback in discretionary consumption trends during Chinese New Year. The effects of a weak economy first showed up in 3Q15. Other store-specific factors were: Loyang (ongoing renovation), Woodlands (weak RM) and Geylang (lower liquor sales), but the weak economy seems to be the main factor. 

… but also in muted bidding for new stores by competitors
On the bright side, weak retail spending and labour cost pressures helped Sheng Siong sustain its recent trailblazing pace of store growth. Four more stores (Junction 9, Circuit Road, Upper Boon Keng, Fernvale) have been added YTD. This adds ~25k sq ft of retail space. The ability to get stores is due to the subdued presence of NTUC and Giant in bids. Our assumptions (~32-34k sq ft new GFA/year) are now 74% achieved for FY16.   

Margins were broadly maintained, down qoq on sales mix
1Q gross margins were 24.5%, up 0.1% pt yoy and down 0.5% pt qoq. Gross margins were lower qoq because CNY festivities usually bring about a higher mix of grocery sales; these have lower margins vs. fresh food. With productivity initiatives still in the works, margins are expected to be maintained at 25%, and gradually peak at 26%.   

Results beat primarily from government grants
1Q16 beat expectations primarily due to other income (S$3.8m vs. our expectations of S$2.2m). Sheng Siong does provide for government productivity incentives but realised it underprovided S$1m for 2015 when actual wage credits came in. Management raised guidance for productivity incentive contributions, as gradual expiry of wage credits will be replaced by productivity and innovation credits. Our EPS is raised 2-4% on this.     

Maintain Add, starting China in a cautious manner
Our higher estimates spur our target price slightly higher. In our opinion, its premium valuations reflect stable earnings in tough times. Sheng Siong has started a store in Kunming, but this is not expected to exert meaningful contributions in FY16-17. 

Sunday, April 24, 2016

Suntec REIT - Unwavering against headwinds

1Q16: Higher yoy revenue and NPI 
Despite the absence of Park Mall, 1Q16 distributable income from operations was in line yoy at S$56m. This was mainly thanks to the higher revenue and NPI from the completion of Suntec City Phase 3 and Suntec City Office. Distributions were boosted by capital distribution of S$4m from the sale proceeds of Park Mall, which notched distributable income up by 7.2% yoy. 

1Q16 confirmed our view that SUN’s DPU profile should be stable
With this S$4m capital distribution plus the redemption of S$280m convertible bonds due in 2018 and the 30%-investment in the Park Mall JV (S$115m), we estimate that SUN has S$11m of sales proceeds left. Taking cue from 1Q16, we believe that the remaining sales proceeds would be utilised to ensure a steady and sustainable DPU profile. We have accordingly factored this into our FY16-17F distributable income.   

Retail: actively renewing leases for Suntec City Phase 1
Committed occupancy for its retail portfolio stood at 98.6% at end-1Q16 (4Q15: 98%, 1Q15: 93.5%). Suntec City’s committed occupancy stood at 98.7% at 1Q16 (4Q15: 98%, 1Q15: 92.5%). However, renewals are likely signed at lower rates. 1Q16 overall committed passing rent is S$12 psf (4Q15: S$12.04 psf, 1Q15: S$12.15 psf). It reduced leases expiring in FY16 (mostly for Suntec Phase 1) to 23.1% (end-15: 27%). The mall secured a large tenant which may bring down leases expiring to the high-teens in 2Q16.

Office operating metrics worse off than retail
Committed occupancy for SUN’s office portfolio stood at 98.3% as at end-1Q16 (4Q15: 99.3%, 1Q15: 99.6%). Suntec office’s committed occupancy stood at 97.5% as at 1Q16 (4Q15: 99.3%, 1Q15: 99.6%). Leases secured in 1Q16 averaged S$8.67 psf (-2% qoq, -6% yoy). SUN signed c.225,000 sq ft of renewal leases in the quarter and brought down its leases expiring in FY16 to 6% (end-15: 14.9%). One of the major off-takers was from the technology sector. 

Unwavering against headwinds, Hold maintained
We believe that the headwinds SUN faces (as gleaned from its deteriorating operating metrics) is counterbalanced by its resolution to keep DPU steady. Hence, we maintain a Hold on the stock. We update our FY16-18 DPU by 0.1-2.5%, leading to a higher DDM-based target price. SUN trades at 0.8x FY16 P/BV and offers an FY16 dividend yield of 5.9%. 

Monday, April 11, 2016

Sheng Siong Group - Store acquisition notionally negative, P&L positive

Acquiring an existing store 
●  Sheng Siong just announced the acquisition of a property (30.6k sf) for S$53m (c.S$1,732 psf). The property (located in Bedok Town Centre) is an existing store that the company has been operating for almost 10 years.
●  Sheng Siong is favoured for its asset light model, which puts this announcement as notionally negative even as our initial calculations suggest a net positive P&L impact. We note this is not the first property the group owns. Including its Junction 9 store (due to open in 2Q16), Sheng Siong will now own four out of the 41 stores that the group operates.

Rationale for store purchase
●  Important store in terms of revenue contribution. This is a big store (30.6k sf) and formed c.7% of end-FY15 total GFA. Given that the store likely enjoys higher footfall from being attractively located beside Bedok mall, the interchange and train station, we estimate the revenue contribution from this store to be 5-10%. We therefore read the acquisition as the company not wanting to risk losing an important store.
●  Potential positive P&L impact. Our back-of-the-envelope calculations suggest the P&L impact could be positive. 

Balance sheet still strong
●  This property purchase does little to dent the group’s balance sheet (net cash of S$126m as at end FY15). Ex final dividend and this property purchase, the group will still have net cash of S$47m. The group also generates strong operating CF (S$73m in FY15). 

Maintain Add, no change to estimates
●  We maintain our forecasts for now, even as we suspect a slight positive P&L impact. Our target price is kept at S$0.95 (still based on 22x CY17 P/E, historical mean). Maintain Add. The stock offers an attractive yield of 4%.