Sheng Siong Group - Maybank Kim Eng 2016-06-27: Landing Sunny Side Up

Sheng Siong Group - Maybank Kim Eng 2016-06-27: Landing Sunny Side Up SHENG SIONG GROUP LTD OV8.SI 

Sheng Siong Group (SSG SP) - Landing Sunny Side Up


Strategic & tactical opportunities in one; BUY.

  • A name that stands for low cost and great value, Sheng Siong is the only pure-play supermarket operator in Singapore. A steady consumer-staple business with above-sector yields, Sheng Siong should be a key part of any consumer stock portfolio. 
  • Near-term catalysts include consensus upgrades as we expect same-store sales growth to return and accelerate, driven by higher food inflation since early 2016. 
  • We resume coverage with BUY and street-high TP of SGD1.12, based on blended DCF (WACC 7.2%, LTG 1.5%) and 22x FY17 P/E valuations.


Above consensus; expect SSS to recover

  • We expect SSS growth to return this year after flattening for 4 quarters and turning negative in 1Q16. Growth should re-appear as soon as 2Q16 and accelerate this year on sustained high margins. 
  • Our FY16-17 forecasts are 5-6% above consensus, driven by food inflation, a key leading indicator that has already risen following MAS’ monetary loosening. Sheng Siong should benefit, with 40% of sales from fresh food.


Market too pessimistic on selling space

  • Weighted selling space can still grow in FY17 even with its second largest store about to close. Two redeveloped stores will re-open early next year with more space than before. Sheng Siong will also likely keep two other stores earlier threatened by landlord sales. 
  • Consensus has over- compensated and as a result, are now too low. There could also be upside if the pipeline of new sites expands by more than expected.


Risk premium has receded

  • Lastly, the risk premium on unexpected store closures has receded, in our view. In 2011, the closure of two stores hit revenue and profits badly. Sheng Siong’s vulnerability to such risks is now smaller than in 2011, as: 
    1. its stores have almost doubled from 2011 to 42 now; and 
    2. revenue from its five largest stores has halved to under 5% of its total each, from 10%, with the majority of stores contributing only 1-3% of revenue each.


Swing Factors


Upside

  • Stronger-than-expected revenue growth on the back of food inflation.
  • Better-than-expected food-cost savings or lower labour costs following greater automation.
  • Wins more-than-expected tenders for public-housing sites for new supermarkets.

Downside

  • China supermarket venture does not take off.
  • Unable to pass on higher food costs due to competition.
  • Manpower shortages could affect Singapore operations. Due to high % of fresh food, more workers per store needed than competition.





Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-27
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.12 Up 1.07


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