Wednesday, June 08, 2016

Sheng Siong Group - Overhang of store closures removed

Overhang of store closures removed 
Sheng Siong was due to lose three big stores in 1H17 - Woodlands (40k sf), Jurong Superbowl (16k sf), The Verge (45k sf), which combined formed 23% of end-1Q16 total GFA. There were concerns the store closures could negate the positives of new store openings. The Woodlands store will still be closed in Jun 17, but management said it will likely retain the other two stores. As such, our store growth assumptions remain intact. 
Three new stores opened in 2Q16 (store count as at end-1Q16: 39)
The three stores are: 1) Circuit Road, 2) Upper Boon Keng, and 3) Fernvale. A fourth store, Yishun J9 will open in mid-Aug. These stores add c.25k sf of retail space, or about 6% to end-1Q16 GFA. The latest update on the status of Yishun J9 is that 15.5k sf of the total 19k sf space has been approved for supermarket use, and the company intends to lease the remaining space to food operators. Even as competitors such as Dairy Farm are consolidating stores, Sheng Siong continues to be on the lookout for new stores. 
SSSG contracted for two consecutive quarters…
SSSG first turned negative in 4Q15 (-1.7% yoy) and continued being negative in 1Q16 (-0.5% yoy), although the contraction did improve sequentially. While a weak retail environment contributed to the contraction, store specific factors also played a part e.g. Loyang (ongoing renovation), Woodlands (weak RM), and Geylang (liquor sales ban). Ex-Woodlands, SSSG would be flattish (+0.1%), impressive given the industry’s -1.1%. 
…but outlook could be better
While we do not expect exciting growth, we think SSSG could return to a small positive. Management sounded cautiously optimistic when asked about its outlook, and we think the company will also be coming off a lower base as 2Q15 was impacted by SG50 promotional activities. Store specific factors would also have less of an impact with the liquor sales ban having come into effect in Apr 15. 
Maintain status quo on China strategy
There is no change to the slated 4Q16 opening of Sheng Siong’s first store in Kunming, a JV with the Kunming LuChen Group. The total retail area will be 54k sf, of which c.40k (c.75%) will be for own use as a supermarket and the remaining will be sub-let out. The recent transfer of 10% equity interest in the JV from Mr Tan Ling San to Xpress Holdings has no impact on the JV operations. Sheng Siong retains its 60% stake and will continue to spearhead operations. Kunming LuChen holds the balance 30%. 
Reiterate Add; our preferred pick over DFI
In the consumer space, we prefer Sheng Siong over Dairy Farm (DFI SP, Hold). Sheng Siong’s earnings growth continues to be driven by new stores and margin expansion, further helped by government grants. On the other hand, Dairy Farm is consolidating stores and faces margin pressure. Our target price is still pegged to 22x CY17F P/E (historical mean). The stock offers an attractive 4-5% yield. Maintain Add. 

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