Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-01-20: Upgrade To BUY With 20% Upside

Sheng Siong Group (SSG SP) - UOB Kay Hian 2017-01-20: Upgrade To BUY With 20% Upside SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - Upgrade To BUY With 20% Upside

  • We upgrade Sheng Siong Group (SSG) from HOLD to BUY on valuation grounds as the stock price has retreated by 20% from its high in late-16. 
  • Even though competition for selling space is high, putting outlet expansion at risk, we believe the company has what it takes to weather this period of irrational exuberance and emerge stronger. 
  • We upgrade the company to a BUY with an unchanged PE-based target price of S$1.12
  • The stock offers a resilient forward dividend yield of 4-4.5%.



WHAT’S NEW

  • Updates after recent meeting. We recently met up with Sheng Siong Group’s (SSG) management. This report highlights our key takeaways.


STOCK IMPACT


Competition for new smaller HDB commercial units to remain strong, driven up by smaller players. 

  • Even though the competition for HDB commercial units remains stiff with the last three winning bids coming in as high as S$20.65 psf, the big players (NTUC Fairprice, SSG and Cold Storage) have conducted bidding in a more rational manner.
  • Smaller supermarket operators such as Yes and Ang Mo Supermarket have driven up prices for smaller HDB commercial units. We see this as an opportunity for SSG further down the road, because if these smaller players are unable to keep up with the high rent, big players may have an opportunity to secure units at more reasonable rates.

Larger unit bidding remains rational. 

  • The open bidding process is conducted for smaller units below 5,000 sf. However, for larger units above 5,000 sf, HDB opens conducts a closed bidding by inviting established supermarkets to tender. 
  • Our channel checks indicate that bidding has remained reasonable in the range of S$8-12 psf. We estimate that about 20% of HDB commercial units undergo the closed bidding process.


STOCK IMPACT


Closure of Woodlands and Verge. 

  • On 22 Dec 16, SSG announced the non-extension of lease for The Verge supermarket which was in line with our expectations. SSG is likely to cease operations sometime in the middle of Apr 17. SSG has indicated that the Verge contributed about 3.3% of SSG’s 9M16 sales. We estimate that SSG’s outlet at The Verge has a total selling space of about 45,000 sf. 
  • SSG also has another large 41,400 sf outlet at Blk 6A Woodlands Centre Road that is scheduled to close in Jun 17. Collectively, this amounts to more than 86,000 sf of lost selling space. However, both these outlets are large outlets with lower sales per sf. 
  • If SSG is able to secure smaller outlets which typically have higher sales per sf, the lost revenue could possibly be mitigated, even though total selling space might decline.

The disruptors. 

  • In Nov 16, TechCrunch reported that US retail giant Amazon is due to debut its Prime delivery service alongside its AmazonFresh grocery service in Singapore sometime in 2017 and has begun acquiring assets such as refrigerated trucks and making new hires. 
  • Also in the same month, Alibaba-backed Lazada confirmed the acquisition of Singaporean grocery startup Redmart for US$30m-40m or at about 1-1.5x price to sales. We estimate that Redmart is the second largest online supermarket in Singapore behind NTUC Fairprice. 
  • The online supermarket space in Singapore is still relatively small as compared with the brick-and-mortar segment. A big risk to our call would be if either Amazon or Redmart decide to engage in aggressive market promotions to entice customers to grab market share. This would possibly drag brick-and-mortar players into giving more incentives to consumers.


EARNINGS REVISION/RISK

  • We make no changes to our estimates.


VALUATION/RECOMMENDATION

  • Upgrade to BUY on valuation grounds with a PE-based target price of S$1.12. This is pegged to peers’ FY17F PE of 25.1x. 
  • SSG offers an attractive dividend yield of 4.3% for FY17.


SHARE PRICE CATALYST

  • A pick-up in same-store sales growth.
  • Securing new HDB commercial units.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-20
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 1.120 Same 1.120



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