Maybank Kim Eng Research 2015-07-27: Sheng Siong Group - Sweet Spot. Initiate with BUY.

Sweet Spot 

  • Initiate with BUY & SGD1.07 TP, at 26x FY16 P/E. Secular growth & re-rating potential. Beneficiary of maturing population. Store & margin expansion to underpin 9-13% EPS in FY15-17. 
  • Lowest-priced supermarket for the masses but widest margins. Defensive; earnings are resilient in downturn. 
  • SGD132m in cash (10% of market cap), yet FY16E ROE is 25%. 

Investment Thesis 

Initiate with BUY & SGD1.07 TP 

  • Founded in 1985 and listed in 2011, Sheng Siong has blossomed into Singapore’s third-largest grocery retailer by sales, from its original single outlet in Ang Mo Kio. It provides customers with “wet” and “dry” shopping options: fresh produce, processed and packaged food products, general merchandise and household products. 

Leader in Low-end Mass Market 

  • Sheng Siong targets the low end of the mass market by offering the lowest prices for common household items. 
  • In our recent price survey, it emerged as the cheapest retailer. Its market share improved from 13.1% in 2012 to 14% in 2014, according to Euromonitor. 
  • Secular Growth Potential Contrary to widespread perception, we see secular growth for Sheng Siong from: 
    1. favourable demographics. Its two strongest customer groups – shoppers in their 40s/50s and foreign workers – are the fastest population growth segments; 
    2. main competitor, Giant, is struggling from competition and rising operating costs; and 
    3. market-share gains from traditional retailers. 

Comparable Margins to FairPrice, If Not Better 

  • Despite its lowest ASPs, Sheng Siong’s net margins beat FairPrice’s and Giant’s. 
  • Its gross margins expanded from 18.7% in 2008 to 24.2% in 2014, despite rising labour costs. 
  • Margins were helped by its new centralised warehouse in 2011, automation, improvements in its product mix and the rejuvenation of underperforming stores. 
  • All these boosted its FY14 PATMI by 22%. 

Expansion Will Dictate Near-Term Growth 

  • Sheng Siong’s outlet expansion is expected to underpin its near-term earnings growth. 
  • As a mass-market operator, its outlets are mostly found in HDB heartlands. It has already secured five locations since Dec 2014. This took its outlets to 38 in May 2015. 
  • Sheng Siong has identified 50 suitable spots for opening on the island. 

Room for DPS Surprises Sheng Siong has zero debt. 

  • Its 1Q15 cash and cash equivalents were SGD132m or 10% of its market cap. 
  • In FY15, Sheng Siong should pay a 3.40 SGD ct DPS, equivalent to a 90% payout for a yield of 3.8%. 
  • It is committed to paying out 90% of its FY15-16 profits. 

Further Re-Rating Potential 

  • We initiate coverage with a BUY. 
  • Despite its recent rally, we see further upside. 
  • We forecast EPS growth of 9-13% pa for FY15-17, mainly from network expansion and better margins. 
  • Our TP of SGD1.07 is based on 26x FY16 EPS, a 10% premium to regional peers
  • We believe Sheng Siong deserves this as it has a higher ROA of 16% and operating margins of 8.8%, vs 5.2% and 2.6% for peers.

(Truong Thanh Hang)

Source: http://www.maybank-ke.com.sg