Sheng Siong - A Solid Performer
- Sheng Siong continues to be our favourite neighbourhood supermarket company, with outlets that sell affordable produce. Since it is a defensive staples play, we believe it would be able to deliver resilient revenue growth along with wider margins in 2017.
- With Dairy Farm opening a new distribution centre in Singapore, we believe the three big supermarket players would collectively have more bargaining power over suppliers in requesting for more rebates.
- Reiterate BUY with a DCF-derived TP of SGD1.21.
Resilient topline growth.
- Since 2015, Sheng Siong has taken advantage of the low rental rate environment to open nine new supermarkets. Even if the SSSG of mature supermarkets (stores that have been open for over two years) remains muted, we believe these nine stores may continue to ramp up and propel Sheng Siong’s topline as we enter 2017.
- In addition, we expect the company to open another four stores (including reopening its Loyang Point outlet) next year.
Margin expansion continues.
- We believe there is still room for Sheng Siong’s gross margins to widen. Its distribution centre is only 75%-utilised, which provides opportunities for it to increase the bulk handling of produce.
- Furthermore, we view the opening of Dairy Farm’s distribution centre in Singapore as a welcome move, instead of one that would impact Sheng Siong adversely. With Dairy Farm joining the fray to push for more bulk handling, we believe the three big supermarket players (the third and largest player being unlisted NTUC Fairprice) can now apply more pressure on suppliers for even higher rebates. This would help to improve the gross margins of all the supermarket players.
Maintain BUY with a TP of SGD1.21.
- Sheng Siong’s business generates strong cash flow.
- Our DCF-derived TP is based on a 7.26% cost of equity, 2.5% risk-free rate, 0.7x beta, 9.3% market return and a terminal growth rate of 2.5%.
- Our TP implies 26x FY17F P/E, which is at a slight premium to its peer average of 24x.
Key risk – increased competition for rental spaces.
- Given Sheng Siong’s strong gross margins, small mini-mart chains as well as mom-and-pop grocery stores have started sprouting in commercial spaces around Housing Development Board (HDB) areas.
- While we do not view these players as significant competitors in the grocery retail market, Sheng Siong’s ability to open new stores would be hampered if these small chains help to drive up rental rates.