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%.

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