Sheng Siong - A Defensive Play In Consumer Staples
- Sheng Siong is still one of our Top Picks in the consumer sector.
- We believe its share price has underperformed since Oct 2016 on the back of negative SSSG as well as stifling competition in the HDB commercial rental market space. However, we expect the ramping up of the nine outlets opened since 2015, coupled with the reopening of its Loyang Point outlet and expansion of its Tampines Central outlet, to support topline expansion in 2017.
- Reiterate BUY, with a TP of SGD1.21 (28% upside).
Margin expansion to continue.
- We believe the gross margin expansion story for Sheng Siong remains intact. Currently, its distribution centre is only 75% utilised – this gives room for more bulk handling, moving forward.
- Moreover, given the soft consumer spending environment, we think the three big supermarket players (NTUC FairPrice, Dairy Farm (DFI SP, BUY, TP: SGD8.50) and Sheng Siong) would be in a strong position to squeeze suppliers for additional rebates.
Maturing stores to support growth.
- The closure of the two outlets in Woodlands and The Verge has been accounted for in our forecast. We believe the loss in revenue would be more than offset by:
- The maturing of the nine outlets opened since 2015;
- Reopening of the Loyang Point outlet;
- Expansion of the Tampines Central outlet.
Competition from smaller players is unsustainable.
- Securing new outlets for expansion has, once again, become challenging since 4Q16.
- Small supermarket and minimart chain operators have been bidding up the Housing and Development Board (HDB) commercial renting market to as high as SGD20.65 per sqf. We believe this is unsustainable because the supermarket business is generally a volume game.
- NTUC FairPrice and Sheng Siong have historically secured outlets at lower rental rates and were only able to achieve operating margins of 5.9% and 8.7% respectively in 2015.
- Given the lower sales volumes of these smaller players, we believe they would not be able to achieve the same level of efficiencies or bargain for as much rebates from suppliers. Hence, we expect the stiff competition in the HDB commercial rental market to taper off in 2H17.
Reiterate BUY, with a TP of SGD1.21.
- Sheng Siong remains one of our Top Picks in the consumer sector. We continue to like the company for its strong cash flow and stable dividend yield of about 4%.
- Our forecasted numbers and TP remain unchanged. Our DCF-based TP of SGD1.21 also implies 26x FY17F P/E.