Sheng Siong Group (SSG SP) - Maybank Kim Eng 2016-12-13: Competition for Sites Heating Up

Sheng Siong Group (SSG SP) - Maybank Kim Eng 2016-12-13: Competition for Sites Heating Up SHENG SIONG GROUP LTD OV8.SI

Sheng Siong Group (SSG SP) - Competition for Sites Heating Up

Competition & execution risks on the rise 

  • We downgrade Sheng Siong to SELL from HOLD with a blended DCF/PE target price of SGD0.88 (from SGD1.06). 
  • We detect a deal-changing rise in competition for prime selling space and customers at a time when belts are being tightened. 
  • Sheng Siong’s new outlet expansion plan is at risk. This is critical because new stores drive sales growth much more than old stores. Worst, two big store closures coming up in 2017 could be left with a shortage of new stores to pick up the slack. 
  • Recommend switch into Jumbo (JUMBO SP, TP SGD0.78).

No Christmas joy from the HDB 

  • Sheng Siong did not succeed in getting two HDB sites again, shortly after failing to secure one in Oct.
  • According to HDB’s industrial and commercial property e-bidding portal, a 288 sq meter lot in Tampines (Blk 878C Tampines Avenue 8) was secured by a small supermarket chain, Yes Supermarket. 
  • Yes, owned by the Chairman of the Tampines Merchant Association Mr Kwek Hong Lim, already operates four supermarkets in Tampines and appears to be attempting to monopolise the Tampines region. 
  • Another site, a 311 sq meter shop lot in Sengkang (Blk 215C Compassvale Drive) was also secured by an individual named Raymond Chan, whom we believe is from U Stars Supermarket, an operator of three supermarket outlets that recently diversified from its coffee shop roots. 
  • In addition, bidding prices have increased dramatically in the past two months from SGD15 PSF in Oct to SGD17 PSF in Oct/Dec and now with the Yes Supermarket bid in Tampines exceeding SGD20 PSF. Sheng Siong bidded only SGD16 for the Tampines site, 21% below Yes. For the Compassvale site, it lost out narrowly to U Star with the winning bid only 3 cents higher. As for the Choa Chu Kang, we understand from management that it bidded up to only SGD16 as well.

Competition for sites is heating up 

  • Competition appears to rising for prime selling space from the only landlord in town that can move the needle for Sheng Siong - the HDB. 
  • We understand that Yes has been in the supermarket scene for years, while U Stars is the new kid on the block as they are mainly a coffee shop operator that is now diversifying into supermarkets. Yes and U Stars’ aggressive bidding to secure sites is a concern to us. 
  • At worst, there may be a risk of the bigger players deciding to follow suit, especially if the continuing inability to secure sites threatens to upset their continuing expansion plans, while at best, it may delay Sheng Siong’s new outlet expansion plan – neither of which are appealing. This is especially so since new outlets drive sales a lot more than old outlets.

Also, no big sites coming up for tender except… 

  • In addition, there is no supermarket site coming up for bidding in the next six months that involves the critical Woodlands region, as Sheng Siong has a 41,400 sq ft store at Blk 6A Woodlands Centre Road that is scheduled to permanently close in June 2017 (end of lease). This is its second biggest store in terms of GFA after The Verge (45,000 sq ft; also expected to close down in early 2017) and estimated to be its third largest revenue-generating store at 5-6% of group revenue. 
  • A full replacement of the Woodlands store is looking less and less likely.

…for a closed-bid site; last chance for 2016 

  • However, we understand that Sheng Siong is also in bidding for a closed-bid site at another location that is fairly sizeable. If it wins the site, this site would be enough to fulfil our forecasted new selling space expansion for 2017 though it will be nowhere near as big as Woodlands. 
  • At this stage, details are still lacking as the bidding is still in progress but the location appears to be very promising as it is a mix of old and new estates with the potential for substantial new HDB developments to be added in the next few years. However, if it again fails to clinch this site, there is a potential risk that its new store opening plans could be jeopardised. It highlights that execution risks are rising for Sheng Siong. 

Specific and long-term forecasts cut; D/G to SELL 

  • The increased competition for sites and selling space may take some time to trickle through to the ground and affect Sheng Siong but it would appear that the signs of keener competition are being written as we speak. 
  • We leave our FY16E and FY17E forecasts unchanged but lower our forecasts for FY18E, FY19E and FY20E by 3.5%, 7.1% and 10.3% respectively
  • In addition, we cut the long-term growth assumptions (for FY21 to FY25) that we use in our DCF valuation for Sheng Siong from 5% to 3% to account for expectations of slower growth ahead. As a result, our blended DCF/PE valuation for Sheng Siong is cut to SGD0.88 (WACC 7.5%, LTG 1%, FY17E P/E 20x). 
  • Downgrade the stock to SELL.

Prefer Jumbo over Sheng Siong 

  • We upgraded Jumbo (from HOLD to BUY) at the same time that we downgraded Sheng Siong (from BUY to HOLD) in Sep 2016. 
  • We now keep Jumbo as a BUY while Sheng Siong is now a SELL. The pair trade has worked out well so far and as Sheng Siong’s industry dynamics worsen, we think investor interest in Jumbo will grow. 
  • Recommend switch to Jumbo. (27 Sep 2016 report “When flying elephants trump runny eggs”)

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-12-13
Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 0.88 Down 1.060