Sheng Siong Group

CIMB Research, Sept 4

SHENG Siong did a share placement yesterday (Sept 3, 2014), issuing 120 million shares at S$0.67/share, adding ~S$79 million (net of fees) of capital and causing 8.7 per cent dilution. Outstanding shares rise to 1,504 million (previous: 1,384 million).We trim our FY15 EPS by 8 per cent.

Our immediate reaction is a negative, since this creates immediate dilution without any foreseeable earnings upside. We see this as a replenishment of its cash pile. H1 FY14 ending net cash (S$95 million) will dwindle down to ~S$30 million, after paying for Tampines (~S$65 million). This placement takes the post-Tampines cash pile back to S$110 million, giving them the means to bid for sites, if needed. Sheng Siong still has to pay for J9 (~S$55 million by 2017) in future. We expect the funds to be used for selective acquisition of new sites for growth, or sites on some of the existing outlets with expiring leases. Sheng Siong will not be committing more funds into the China JV at this juncture. We view acquisition of existing sites as a defensive strategy to ensure that they can retain shop space in the face of competition. It will not boost earnings. We see that strategy as a necessity but we are not too hot on it. We are more excited about new store growth, if it happens, since that will add to earnings. S$80 million will probably buy it another 2 stores (~20,000 square feet each), assuming capital values of ~S$2,000/sq ft. Sheng Siong has 33 stores now. Buying retail stores is an asset-heavy strategy that is equivalent to putting capital into hard assets that generate ROEs of 4-6 per cent, versus a business ROE of 25 per cent ROE ie not good The question is whether it will be buy new or existing stores, management sounds like they do have new store targets.

We maintain our "add" rating only because share price has tumbled, reacting to the dilution. Our fully-diluted target price is revised to S$0.73 (from S$0.79), factoring in the effect of the placement. Our grouse with Sheng Siong is that it did not have store growth to drive earnings. This placement is clearly in preparation of store growth and we will not be too negative, despite the dilution.

ADD