Sheng Siong Group - CGS-CIMB Research 2018-05-31: Singapore’s Stalwart Supermarket Brand

SHENG SIONG GROUP LTD SGX: OV8

Sheng Siong Group - Singapore’s Stalwart Supermarket Brand

Although Sheng Siong Group's share price has risen 7% YTD to 18.6x forward P/E, it) is still trading below its ASEAN peers (22.6x) and its historical 3-year average (20.9x).
We think Sheng Siong Group will achieve its long-term target of 50 stores by 2H18F. Its supermarket tender pipeline is robust, lending upward bias to our 2-year EPS CAGR of 8.9%.
Its heartland consumer focus makes Sheng Siong Group least vulnerable to the rising e-commerce threat, in our view and its net cash position is dry powder for upgrade or M&A.

Maintain ADD and S$1.18 Target Price. We peg our Sheng Siong Group target price at 22.1x FY19F P/E (+1 s.d. above historical 3-year mean of 20.6x) given the revival in its store count growth.

In FY17, Sheng Siong Group (SSG)’s share price fell by 2.1% y-o-y due to these concerns:
1. lack of new stores (no wins from Apr 2016 to May 2017),
2. possible gross margin (GPM) erosion,
3. large store closures, and
4. the threat of Amazon Prime.
However, its 1Q18 store count rose to 48 (end-FY17: 44), with two more opening in 2Q18, which would lift store count to 50 by end-2H18F (SSG’s long-term goal).
1Q18 GPM of 26.2% was higher than the 25% in 1Q17. Same-store-sales growth (SSSG) rose 5.6% in 1Q18 due to improved store efficiency and retail sentiment.

Sheng Siong Group’s GPM has risen steadily y-o-y since FY12 due to savings from bulk-handling services, high supplier rebates and higher proportion of fresh produce sales. Extension of its distribution centre commenced in Jul 2018 and is due to be completed in 3Q18, boosting Sheng Siong’s storage space by 50k sq ft (existing 500k sq ft).
We conservatively project FY18-20F GPM of 26.2-26.5% (Sheng Siong Group’s long-term GPM target is 28%).

As at end-1Q18, Sheng Siong Group was net cash (5.2Scts/share) with no borrowings. We estimate its end-CY18F cash position to grow to c.S$96m, assuming no large acquisitions (capex historically spikes above c.S$28m when Sheng Siong Group purchases locations).
In FY17, its dividend payout was cut to c.70% (FY11-16: 90%) due the competitive retail environment and for Sheng Siong Group to shore up resources for M&A opportunities. We believe Sheng Siong Group can easily revert to a 90% payout given its strong balance sheet, lifting FY18F dividend yield to 4.4% (3.4% in FY18F, based on our estimates).

In our view, e-commerce poses a lower threat to Sheng Siong Group than to its peers, given its low product price point and Singaporeans’ preference for personally picking fresh foods.
Sheng Siong Group also has large scale (Singapore’s third-largest supermarket by market value in FY17) and has bumped up its distribution space (warehouse extension), which offer some protection market share erosion.
Sheng Siong Group’s online channel ‘allforyou.sg’ started in FY14 but only comprised c.1% of FY17 revenue, illustrating its customers’ preference for store visits.

According to the Housing Development Board (HDB), there are at least c.10 supermarket open bid opportunities (cumulative c.5,900 sq m) available in 2018F and we estimate at least another 16 in 2019-22F. This does not include closed bid opportunities (direct awards) that are in the market.

We like Sheng Siong Group’s niche position as a ‘heartlands’ supermarket brand. Given that its store count is rising and we expect this uptrend to continue (Sheng Siong Group aims to open eight new stores in FY18F) and catalyse earnings growth, we maintain our target price pegged at 22.1x FY19F P/E (+1 s.d. above historical 3-year mean P/E of 20.6x).
The stock is currently trading at 18.6x forward P/E, below its historical 3-year mean. While Sheng Siong's share price has risen 7% YTD, it is still trading below its ASEAN peers average (22.8x) and its historical 3-year average (20.6x).
Potential catalysts are sizeable new store wins, better SSSG, higher dividends and swifter China earnings contribution.
Downside risks are fewer new stores and lower margins.

Cezzane SEE CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-05-31

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