Sheng Siong Group - UOB Kay Hian 2016-09-16: A Cash Cow In A Crowded Space

Sheng Siong Group (SSG SP) - UOB Kay Hian 2016-09-16: A Cash Cow In A Crowded Space SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - A Cash Cow In A Crowded Space

  • We initiate coverage on SSG with a HOLD and PE-based target price of S$1.13. (Entry price: S$1.01). 
  • While it is clear that SSG’s cash-flow generative capabilities resonate well with market participants, we believe its share price mostly reflects this positive view. 
  • In the long term, SSG’s positioning in the grocery category will be challenged due to increased competition from e-commerce players and a lack of growth opportunities domestically. 
  • Nonetheless, we applaud management on their execution capabilities and ability to manage costs in a competitive environment. 



WHAT’S NEW

  • We initiate coverage on Sheng Siong Group (SSG) today.


INVESTMENT HIGHLIGHTS


Local earnings group growth constrained but expect near-term margin expansion.

  • SSG has a total of 42 stores in Singapore. Most of SSG’s stores are located in highdensity Housing Development Board (HDB) estates where spending power is low. The company operates on an opportunistic model by securing good locations on preferable terms where needed or available. 
  • Even though we see potential gross profit margin expansion from higher fresh-food sales, we believe the local supermarket store penetration rate is high at about 230 stores/million households in Singapore vs our estimate of about 300 stores/million households in the US.

But cash generation will remain strong. 

  • SSG has a history of generating substantially strong operating cash flow, with a negative cash conversion cycle and high ROE vs its ASEAN peers. Operating cash flow grew from S$34m in 2012 to about S$74m in 2014.
  • We believe SSG’s mass market positioning lends a defensive aspect to its business and allows it to deliver steady sales through economic cycles.

Industry faces potential disruption. 

  • There is a false sense of security that online grocery suppliers will always remain a niche or online retailers such as AmazonFresh and Redmart will continue to trip on last-mile deliveries. 
  • Online retailers represent a very substantial threat to brick and mortar players as they do not face the constraints of space, size and location nor are they as severely impacted by rising rent and staff cost. These disruptors are able to offer an unlimited product selection and operate with a structural advantage. 
  • We believe online grocery suppliers provide customers a completely different value proposition.

Chinese expansion and automation efforts could surprise on the upside. 

  • SSG will open its first overseas store in Kunming China in 4Q16. Kunming is the largest city in the Yunnan Province and home to some of the largest businesses in the region. The Chinese supermarket industry is extremely competitive and while upside potential is great, execution risks remain as with most overseas expansion. 
  • SSG is also investing heavily in automating certain processes within their stores.


VALUATION/RECOMMENDATION

  • We initiate coverage on SSG with a HOLD recommendation and a PE-based target price of S$1.13 pegged to peers’ FY17 PE of 25.1x. This is based on a regional FY17 peer comparison. The stock offers an above-average dividend yield of 3.5% vs peers’ 1.7%.
  • We reiterate our view that even though the cash-generative capabilities of the company are strong and the company is free of borrowings, most of the positives have been priced in and we would only be buyers closer to S$1.01.
  • We would be inclined to apply a premium to where the peers are trading at, should its overseas execution plan prove successful. 
  • Our preferred entry price is S$1.01.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-16
UOB Kay Hian SGX Stock Analyst Report HOLD Initiate HOLD 1.13 Same 1.13

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