Sheng Siong Group - RHB Invest 2016-01-13: Safe Is Good

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SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group - Safe Is Good

• Sheng Siong remains a Top Pick for the consumer sector and we expect its business to remain resilient despite the macroeconomic headwinds. 
• Maintain BUY with DCF-based SGD1.05 TP (from SGD1.10, 27% upside), after minor tweaks to earnings estimates. 
• We believe the stock is to remain a safe haven, given the strong majority shareholding, defensive business and healthy dividends. 

 Recession-proof business. 

• We believe Sheng Siong has a resilient business, which would thrive during recessions. 
• In our recent trip to various supermarkets in Singapore, we noticed that there may be some trading down by higher-segment consumers, ie expatriates to NTUC FairPrice from Cold Storage and working professionals to Sheng Siong from NTUC FairPrice. This is common during poor economic conditions. 

 Consumers trading down. 

• On an overall price basket basis, we believe that Sheng Siong is the most competitive in Singapore, about 2-3% lower than NTUC FairPrice. It is also well-perceived for providing value to consumers. 
• The company is able to maintain healthy margins by: 
  1. being operationally cost efficient,
  2. undertaking bulk purchase using its central warehouse, and 
  3. directly sourcing for its fresh food offerings. 

 Upside for new stores this year. 

• We believe the rental environment is currently conducive to Sheng Siong, given the weak consumer demand. 
• Management is optimistic about securing new stores in 2016, given the bumper crop of 61,000 new Housing and Development Board (HDB) flats to be completed over 2H15-2017. 
• Given the long-term nature of HDB estate leases, this could potentially help the company secure a next leg of growth. 

 Expecting strong 4Q15 results, maintain BUY. 

• After fine-tuning our FY15F earnings estimates by 1%, our TP is tweaked to SGD1.05 (vs SGD1.10), implying 25x P/E. 
• We expect Sheng Siong to announce strong 4Q15 results at end-February, with YoY net profit growth of 21% to SGD14.2m. 
• We also expect final dividend of 1.75 cents/share, bringing full-year dividend to 3.5 cents/share. 
• Given the strong cash flow and net cash position, we expect Sheng Siong to be able to maintain a 90% payout ratio in FY16. 
• The key risk to our forecasts would be unsuccessful expansion of new stores. 

James Koh RHB Invest | http://www.rhbinvest.com.sg/ 2016-01-13

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.05 Down 1.10