Singapore Consumer - DBS Research 2016-12-09: Improvement to be backed by regional recovery

Singapore Consumer - DBS Vickers 2016-12-09: Improvement to be backed by regional recovery COURTS ASIA LIMITED RE2.SI THAI BEVERAGE PUBLIC CO LTD Y92.SI SHENG SIONG GROUP LTD OV8.SI JUMBO GROUP LIMITED 42R.SI

Singapore Consumer - Improvement to be backed by regional recovery

Latest developments 

September retail sales  

  • September retail sales (ex motor vehicles) declined 1.9% y-o-y led by departmental stores, apparel and footwear, furniture and household equipment, recreational goods, watches and jewellery, computer & telecommunications equipment and optical goods and books. 
  • Including motor vehicle sales, (+20.4% y-o-y) retail sales grew +2% y-o-y. F&B services index rose 3.5% led by fast food and dining outlets. 
  • Grocery retail performance was varied, with 2.9% y-o-y growth for minimarts and convenience stores but -4.1% y-o-y growth for supermarkets.

Employment/wage data 

  • 3Q16 resident unemployment (SA) has dipped to 2.9%, but MAS forecasts employment growth to remain weak. Wage growth (y-o-y) in 3Q16 fell to 3.4% (-0.5ppt from 3.9% in 2Q16). 
  • The nominal median monthly income for full-time employed residents was S$4,056 per month in June 2016, based on the latest report released by MOM.

Industry news 

  • Amazon is entering the Prime delivery service and Fresh grocery service e-commerce segment in Singapore next year. It is reportedly hiring new people and purchasing assets including refrigerated trucks. It will be the second large-scale pure play e-commerce grocery retailer in Singapore after Redmart (owned by Alibaba’s Lazada) if formed. 
  • Three brick-and-mortar grocery retail incumbents (Dairy Farm, NTUC Fairprice and Sheng Siong) which dominate about 90% of Singapore supermarkets have their own online channels as well.

Earnings Outlook 

Growth driven by exposure outside of Singapore.

  • We are projecting Singapore Consumer sector (for stocks under our coverage) to post earnings growth of 8.6% yo-y in FY17F, driven mainly by companies’ exposure and growth outside of Singapore. This is underpinned largely by expectations of a continued pick-up in consumer sentiment in regional economies, such as Thailand and Indonesia. We expect domestic demand in Singapore to remain relatively lacklustre on the back of subdued GDP growth and macro uncertainties.
  • Based on 3Q16 results posted by Singapore-listed consumer companies (as at time of writing), performance has been generally robust arising from gross margin expansion. As per our earlier expectations, we are seeing companies enjoy the benefits of lower raw material prices.
  • For instance, Fraser and Neave (FNN) and Delfi have benefitted from lower sugar and milk powder prices which reached a low in 2015. That said, top-line growth was largely lacklustre on the back of uncertain consumer sentiment across the region.

Acquisitions could further boost earnings. 

  • Potential acquisitions could provide a boost to growth. Several companies have available cash and debt resources to undertake acquisitions. For instance, the majority of companies under our coverage - FNN, Delfi, Super, Jumbo and Sheng Siong - are in net cash positions while Thai Beverage (ThaiBev)’s gearing has reverted to c.0.2x net debt/equity. 
  • We believe M&A and/or inorganic growth opportunities for these companies to leverage on their strong balance sheets could provide a catalyst for the sector.

2017 consumer sentiment, GDP largely positive.

  • Regional consumer sentiment is largely on the uptrend in 2016 with the exception of Thailand and will likely continue for 2017. Philippines’ consumer confidence has been strong on the back of the presidential election year.
  • Malaysia’s consumer confidence has seen gradual recovery post-GST implementation in 2015. Consumption consumer confidence has also recovered in 2016 for Indonesia. Meanwhile, domestic demand has remained lacklustre in Thailand. 
  • We also expect most ASEAN economies’ GDP growth to accelerate into 2017 on the back of better regional consumption. Malaysia, Thailand and Indonesia’s GDP growth is expected to accelerate from 2016, while Singapore’s GDP growth is expected to be largely flat. Philippines’ GDP is expected to decelerate.
  • But this is due to a high base from the election year.

Valuation & Stock Picks 

Focus on growth, value, and earnings. 

  • Our picks for 2016 are centred around growth, earnings resilience and value. 
  • Stocks with the strongest fundamentals and with earnings resilience and growth continue to be ThaiBev and Sheng Siong. Both Jumbo and Courts are offering regional growth at compelling valuations.

Valuations slightly above average. 

  • Sector valuation is currently at about 22x PE, which is +0.5SD above its 10- year historical average. This has tapered off marginally, particularly with the recent uncertainty in regional markets and slower-than-expected improvement in top line year-to-date. That said, there is potential for re-rating should top-line growth in 2017 come in stronger than expected and/or accretive acquisitions be made by specific companies.

ThaiBev (THBEV SP, S$0.90, BUY, 12-mth TP: S$1.09) 

  • We like ThaiBev for its exposure in Thailand, resilient and dominant Spirits operations, providing the bulk of the group's cashflow. In addition, Beer operations should continue to retain its market share gains after the rebranding of Chang Beer. With the rebranding and increase in brand awareness, this puts management in a better position to manage its margins.
  • We see ThaiBev in a transformational mode to morph into a regional player. We believe its earnings momentum, coupled with its ongoing transformation into a regional beverage player, will aid in further re-rating the counter.
  • In addition, a key catalyst could arise from the corporate restructuring of its associate, FNN coupled with potential acquisitions (leveraging on its net cash position) to expand into the Indochina region. In our view, this would provide a further boost to earnings and stock price re-rating.

Sheng Siong (SSG SP, S$1.01, BUY, 12-mth TP: S$1.19) 

  • We like Sheng Siong for its earnings growth traction, efficient operations, strong ROE, defensive earnings qualities, dividend yield and net cash balance sheet. Although store closures are expected for FY17F, we see continued margin expansion through 
    1. direct sourcing from suppliers which include farmlands in Malaysia; 
    2. higher sales of house brands, which currently constitute less than 10% of turnover; 
    3. higher fresh mix from the displacement of wet markets in Singapore; 
    4. more bulk handling as it expands and adds another 45,000 sqft of warehouse space at its Mandai distribution centre. 
  • The stock has a dividend yield of c.4%.

Jumbo (JUMBO SP, S$0.66, BUY, 12-mth TP: S$0.77) 

  • We like Jumbo for its rapid growth in China, close to 30% ROE in FY16F, relatively higher margin than peers, cash generative business, and strong net cash balance. We see no signs of margin pressure as crab costs vs revenue per head remains consistent. 
  • While Jumbo is growing rapidly in China, new JVs and franchise partnerships in other parts of Asia will help add to earnings growth going forward.

Courts Asia (COURTS SP, S$0.45, BUY, 12-mth TP: S$0.50) 

  • Courts is an earnings recovery and value play.
  • We expect earnings to recover on the back of better cost management and margins. We forecast top line to remain robust driven by accelerating GDP growth, store expansion and consumer sentiment recovery in Malaysia and Indonesia. Focus on bundled value-added services and cost management will help improve margins and reduce operating expenses. 
  • Valuation is compelling at 9x FY17F PE (near -1SD of its forward PE valuation) and 0.7x P/BV. The stock also offers a dividend yield of close to 4%.


Higher margin compression from rising raw material prices, absence of pick-up in consumer sentiment.

  • Our central theme to earnings growth for the sector in general is stronger regional top line on consumption recovery and pick-up in sentiment, such as in Indonesia and Thailand. 
  • At the same time, we expect margins to take a back seat in 2017, compared to 2016. We are already cognisant of rising raw material prices and are expecting some margin compression. That said, in the event of spikes in raw material prices and further weakening of regional currencies against the US dollar, this may erode margins more than expected, particularly so if the expected pick-up in sentiment does not materialise.

Alfie Yeo DBS Vickers | http://www.dbsvickers.com/ 2016-12-09
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