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

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%.

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.

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.

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%.

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.

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.

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

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