Wednesday, July 27, 2016

Sheng Siong Group - Record-high gross margins

Sales growth mostly driven by new stores 
2Q16 sales (+5.5% yoy) reflect 1) growth from new stores (+6.0%), 2) SSSG (+2.2%), but 3) mitigated by the temporary closure of Loyang (-2.7%). New store sales growth was driven mostly by the continued gestation of five stores opened in FY15, with some contribution from three new stores opened in 2Q16. We think new stores will continue to propel overall topline growth. New stores now make up c.20% of the group’s total store count, or c.8% of total GFA. 
SSSG (+2.2% yoy) surprised positively
We had expected SSSG to turn around, but not by this magnitude, especially after two consecutive quarters of declines. We note that this included the McNair store which was closed for a month in 2Q15 for refurbishment, but SSSG would still have been an impressive +1.3% nonetheless. Key reasons for the turnaround include: 1) subdued ringgit impact at the Woodlands store, 2) the no-longer-relevant alcohol ban that took effect in Apr 15, and 3) completion of renovation works at some of the stores. 
Record-high gross margin (26.1%)
In addition to SSSG, the other standout in this set of results was the vast improvement in 2Q16’s GPM to 26.1% (1Q16: 24.5%, 2Q15: 25.2%), driven by suppliers’ rebates, bulk handling and continued efficiency gains from its central distribution centre. Opex remained stable, as expected (2Q’s opex as a % of sales was 17.7%, similar to the 17.1% average over the past 3 years). We lift our FY17-18F EPS on higher GPM assumptions. 
Updates on new stores, Tampines and a new warehouse
1) Yishun J9 (18.9k sf) will be the group’s fourth new store this year and is due to open in Aug 16. 15.5k sf of the total space will be for the group’s own supermarket use while the remaining 3.4k sf will be leased to a food court operator. 2) Alteration works at Tampines (10k sf) is now postponed to commence in Mar 17 instead of Oct 16. It will open with a bigger store area (25k sf) in May 17. 3) The group entered into a long-term lease for a land adjacent to its central warehouse. Total construction cost is c.S$20m. 
Interim dividend of 1.90 Scts declared (90% payout)
We continue to like the stock’s highly cash generative business and high dividend yield (c.4%). We maintain our Add call and our target price rises to S$1.04 (still based on 22x CY17 P/E, historical mean) on higher EPS estimates. Catalysts could come from China, where renovation works are currently underway and operations are likely to commence in 4Q16. Risks include a drop in margins. 

Thursday, July 07, 2016

Mapletree Commercial Trust - Landmark acquisition

Buying Mapletree Business City P1 
MCT has proposed to acquire Mapletree Business City P1 (MBC) for S$1.78bn. This works out to be S$1,042psf or at a cap rate of 5.6%. MBC is a large-scale integrated business hub with 1.71m sf of office and business park NLA, with a high committed occupancy of 99% and remaining average lease expiry of 3.5 years. The property has a prominent frontage along Pasir Panjang Rd, and is well connected to public transport and located a short 10 minutes’ drive from the CBD. 
Strategic diversification into a stable asset class
We are optimistic about this acquisition as it offers MCT exposure to the stable business parks segment, as well as diversifies its portfolio concentration risk at Vivocity from 60% to 42% of AUM. The top 10 tenants account for 69.6% of the property’s GRI, and these include notable names like HSBC, IDA, Samsung, Unilever, SAP, Singapore Power and Mapletree Invts. Post purchase, MCT’s AUM and market cap will grow to c.S$6.2bn and >c.S$4bn, respectively, making it one of top 6 largest listed S-REITs. 
DPU accretive with more upside from forward renewals
In terms of impact, a full year’s contribution from the new property is expected to boost DPU by about 3% and lift book NAV to S$1.31/unit. Current blended rents average S$5.94psf/mth with inbuilt escalation clauses of 3%. About 10.8%/12.3% of the leases are due to expire in FY17/18. With office and business parks’ market rents of S$6-7psf/month, we expect to see positive rental reversions upon renewal, thus providing more earnings upside going forward. 
Funded by new equity raising and debt
The purchase is expected to be funded by a combination of debt (S$920m) and new equity. Up to 795m new units could be issued via a private placement and non-renounceable preferential offering exercise to existing unitholders. This will raise overall gearing to 39.4%, still within the S-REIT guideline ceiling of 45%. While details of the equity fundraising exercise are not yet available, our revised forecast assumes an issue price of S$1.40/unit for the new units. 
Upgrade to Add
We upgrade our recommendation to Add from Hold. We believe this purchase will not only be DPU accretive but will strategically enhance MCT’s portfolio in terms of size and stability. Our FY17-19 DPU estimates are raised by 1.1-3% to factor in income from this acquisition. Our DDM-based target price is lifted by a higher 9.5% to S$1.62 as we include the new contributions as well as tweak our cost of equity assumptions to 7.7% (from 8.1%) on the back of the slower interest rate growth outlook.