Singapore Consumer - Maybank Kim Eng 2016-09-27: When flying elephants trump runny eggs

Singapore Consumer - Maybank Kim Eng 2016-09-27: When flying elephants trump runny eggs SHENG SIONG GROUP LTD OV8.SI SHENG SIONG GROUP LTD OV8.SI

Singapore Consumer - When flying elephants trump runny eggs

D/G Sheng Siong, U/G Jumbo 

  • We downgrade Sheng Siong from BUY to HOLD with an unchanged TP of SGD1.13 (6% upside), while upgrading Jumbo from HOLD to BUY with a raised TP of SGD0.78 (32% upside). 
  • As we head into the seasonally stronger 4Q, we believe stocks such as Jumbo which do well in the final quarter of the year will outperform more defensive stocks such as Sheng Siong, which tend to see weaker sales. 
  • This is further compounded by new capacity from July this year, added to its Riverside outlet, which now seat 450 (previously 300) with 6 private rooms. We expect incremental revenue of SGD1m pa, already factored into forecasts.
  • Valuations for Jumbo are also looking more compelling than Sheng Siong at this stage, while the latter is facing a lack of catalysts for the time being. Jumbo trades at 19x FY17 P/E and we project 23% EPS growth while Sheng Siong trades at 24x FY17 P/E but with only 3% EPS growth.

Sheng Siong catalysts have run dry for now 

China expansion delayed, FY17E forecast cut by 1% 

  • Originally slated for handover in July 2016, this was delayed by the developer till September. Even now, Sheng Siong has still not yet been allowed to take over the new space for renovations. The company believes the project is not imperilled given the HK developer’s good reputation but given the delays, it will now not want to open it till after CNY. Management believes the risks of opening a new supermarket in a new market just before a busy festival outweigh the benefits.
  • However, without an on-time opening in 4Q16, which would have allowed it to reap the CNY sales while having enough lead-time to iron out the kinks, the new supermarket could drag down profits in FY17 instead of being a non-factor, in our view. We reduce FY17 EPS by 1% to account for this.
  • On the other hand, FY16 EPS is raised slightly by 0.7% as the pre-opening costs will now have been pushed forward. Sheng Siong does not need to hire staff significantly ahead of time hence it should be able to save on some labour costs this year.

Some concerns are also brewing 

  • One, the sale of the Verge could temporarily affect 1Q17’s sales momentum. A Lum Chang/LaSalle joint-venture was reported to have recently signed the S&P agreement for SGD190m after the first deal to sell the Verge mall in Little India to another buyer at SGD317m in 1H16 fell through. P&L-wise, we expect this development to be largely neutral for Sheng Siong on a full-year basis as management has stated that they will promote its 16,000 sf Jalan Berseh outlet to compensate for the loss of sales at its 50,000 sf Verge outlet. This should not be an issue. Despite the difference in store sizes, we estimate the Jalan Berseh outlet contributes 5-6% of group sales vs just 2-3% for the Verge, which has always been underperforming. However, 1Q17’s sales momentum could be temporarily affected given the lease’s ending in Mar 2017.
  • Two, Sheng Siong may forgo the rights to place a bet at the online stakes. Sheng Siong’s online sales coverage is still pretty much limited to eastern Singapore. Management has no plans to expand this coverage despite the fact that its new distribution centre at Mandai Link certainly allows it to do so. This could be a mistake, in our view. According to recent media reports, Singapore’s biggest online grocery shopping service Redmart has been seeking new funding for a few months now. Our view has always been that traditional brick & mortar players are better positioned cost-wise to play the online game, and a chance is being offered for Sheng Siong to take a bigger share of the pie, even if it is just mind share. If it doesn’t grab the opportunity, someone else will.
  • Three, recent Giant renovation could be a seed of future competition. We noted that the Giant hypermarket at Suntec City has been renovated in the past few months and the range of fresh produce has been significantly expanded. This suggests that while Dairy Farm is closing down premium Cold Storage stores, it is investing in value outlets such as Giant. We also understand that Giant recently bid in a HDB tender for a shop site, after holding back for a while. While the site was won by a mom & pop operator, we can arrive at the same conclusion, that Giant may be reenergising on the local scene.

But Jumbo catalysts are shaping up nicely 

Franchising strategy: not yet, but progressing well 

  • Jumbo has hired a 3 -person team and appointed a consultant to turn its franchising strategy into reality. It eventually expects to beef up the team to 10 people. The operations manual has been completed and the team has been in discussions with strategic partners in various countries. The results of this on -going effort could be made known in early 2017, with profit contributions starting in FY17 and full -year impact in FY18.
  • We were able to glean the following details: 
    • Which food concepts/brands are exportable? Management was optimistic that Singapore -style South -east Asian cuisine will be well - received in China. The next challenge will be Beijing and Shenzhen, but Jumbo has proven that Singapore -style seafood can be successful in Shanghai. After all, they are cosmopolitan cities with well -off populations. With growing demand for South -east Asian food, management also believes Singapore -style cuisines such as bak kut teh and teochew cuisine will travel well. Concurrently, Jumbo’s franchise team has also been talking to partners for seafood in Thailand, while longer -term plans include Korea and Taiwan as well.
    • Type of partners that Jumbo will be keen to work with : They will be existing food & beverage players with franchise experience. They should already be operating a combination of their own restaurants and franchised restaurants. They should also have strong connections that will allow them to secure good locations.
    • Type of franchises that Jumbo is looking at: Depending on the location, the partners’ experience and their ambition, Jumbo could either appoint master franchisees for an entire city or separate area franchisees in each city, depending on its size. The rationale for this is that certain partners may have more local knowledge or connections for different parts of a large city. A city the size of Beijing for instance, could easily support 2 -3 area franchising deals.
    • Number of franchised restaurants per city: Management guided for the market to assume at least 2 Jumbo outlets per city. That is likely to be a very conservative number for cities the size of Bangkok and Beijing, and especially if Jumbo appoints more than one franchise partner for each city. Taking Shanghai as an example, Jumbo already has three self -owned seafood restaurants and is evaluating several sites for a fourth outlet, possibly to be opened in 2017.
    • Ways to monetise the franchise: Typical ways to monetise a franchise are the one -time start -up payment (to tap into Jumbo’s brand -recognition and reputation, and its proven business model) as well as a recurring cut of the cash register. The size of the start -up payment and the recurring fees, which could range from 3% to 5% of gross sales, will depend on the structure of the franchise (master or area?) and whether Jumbo takes an equity stake in the franchisee. In addition to Jumbo selling its pre -made pastes and sauces to the franchisee, there are also other ways that franchisors can make money from the franchisees, such as rebate deals from suppliers of other ingredients or equipment.
    • Pace will speed up once initial investment in place. While the momentum has been slow since management first started talking about its franchise strategy in early 2016, the pace is expected to pick up once the initial infrastructure has been put in place, ie the team, operations manual, partner due diligence, franchise structure, etc.

Franchising potential could have a potent impact 

  • Recurring franchise fees alone can be a potent earnings kicker for Jumbo given the high ticket value of its seafood restaurants. We believe franchisees will be attracted to Jumbo’s high revenue potential of SGD6m per store. Each of its established Singapore outlets, except for the one at the SAFRA resort, makes at least SGD12m revenue pa, and its largest East Coast outlet generates >SGD25m a year. The IAPM Mall outlet in Shanghai is already generating SGD8m a year, by our estimates.
  • In addition, ROI is very high given the relatively low capex per store of SGD2-2.5m. Assuming a 10% net margin and SGD6m revenue per outlet, store ROI can run as high as 25-30% with an investment payback of 3-4 years. Jumbo’s own ROI experience in Shanghai has been even better at 60-70% and payback of just 1-2 years as it was able to capitalise on strong local demand for new cuisine and strong locations serving a clientele that can afford to pay premium prices.
  • In our conservative scenario, just a 3-5% cut of the gross sales alone (excluding other revenue streams) could add a respectable but not an earth shattering 4-7% to FY18E earnings, assuming just two outlets per city and an average revenue of SGD5m per outlet. This is already discounted from management’s guidance of SGD6m per franchised outlet.
  • However, if management wants the franchise strategy to be moderately impressive, it should target at least five outlets per city. Five outlets per city at 3-5% franchise fee pa could boost FY18E earnings by 10-17%, and at 10 outlets per city, 20-33%

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-27
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 1.13 Up 1.130
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