Sheng Siong - RHB Invest 2017-03-08: Irrational Bidding For HDB Sites Has Perhaps Eased

Sheng Siong - RHB Invest 2017-03-08: Irrational Bidding For HDB Sites Has Perhaps Eased SHENG SIONG GROUP LTD OV8.SI

Sheng Siong - Irrational Bidding For HDB Sites Has Perhaps Eased

What’s New? 

  • The latest Housing and Development Board (HDB) commercial sites’ provisional bidding results have been released. While Sheng Siong did not win any the bid for any new sites this month, we note that the small players were not present in that round of bidding. 
  • Based on the provisional results, NTUC FairPrice won the bid, with a rental rate of SGD13 per sq ft for the 5,812 sq ft (540 sq m) of space at Bishan.

Our View 

Irrational bidding from small players has perhaps eased. 

  • In our 7 Feb report, Sheng Siong : A Defensive Play In Consumer Staples, we highlighted that the competition for rental space posed by small supermarket and minimart chain operators is unsustainable. 
  • The small players started bidding for HDB commercial spaces aggressively in 4Q16. Those who won the bids with exorbitant rental rates (close to SGD20 per sq ft) in 4Q16 would probably have commenced operations by now. As such, we believe that the latest provisional bidding results could mean that these players may have begun to feel the pinch.

Sky-high rentals cause small players to fall out. 

  • Based on our understanding, while Sheng Siong has been able to achieve an average revenue of SGD1,826 per sq ft, the gestation of a new supermarket is typically 2-3 years. Therefore, during the first year of operation, the average revenue of a new supermarket would only be 50% of an average mature store. 
  • Small players with lower revenue, poorer margins and insufficient balance strength would not be able to ride out these challenges.

Maintain BUY and a DCF-derived TP SGD1.21. 

  • We maintain our forecasts and TP. Moving forward, we think that competition in the HDB rental market has begun to ease. Over the next six months, there would still be five more commercial units up for the supermarkets to bid for. 
  • Management cited that there are still pockets of areas where Sheng Siong does not have a presence. Hence, we are optimistic that there is still room for Sheng Siong to expand its store count in Singapore.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-03-08
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.210 Same 1.210