Sheng Siong - RHB Invest 2018-05-21: Fancy Fresh Food

Sheng Siong - RHB Invest 2018-05-21: Fancy Fresh Food SHENG SIONG GROUP LTD SGX: OV8

Sheng Siong - Fancy Fresh Food

  • Sheng Siong, our top sector pick, has a Target Price of SGD1.18 offering 18% upside. This implies a total return of 21%, inclusive of the 3.7% dividend yield.
  • We like management’s strong track record in execution. We expect EPS to grow by 11% y-o-y this year, as we think the supermarket operator would continue to benefit from improving consumer sentiment in Singapore.
  • Extension of its distribution centre, set to be completed by 1Q19, may further increase its potential to widen margins.
  • Maintain BUY.

Strong sales to continue this year.

  • We believe Sheng Siong is a clear beneficiary of the recovering consumer sentiment in Singapore. In addition, with the expansion of its Tampines outlet and renovation of the Loyang outlet in 2017, we believe SSSG (same store sales growth) may continue to be strong this year.
  • The group also opened 4 new outlets in 1Q, and 2 more are set to begin operating this quarter. 
  • Also, there are 10 more supermarket sites available for tender from now till the end of the year. As such, we believe it has strong potential to open even more stores and deliver even better results over the next three quarters.

Strong track record in the fresh food segment.

  • Over the years, Sheng Siong’s brand has become synonymous with fresh produce. It still boasts of having the highest percentage of fresh produce mix in its sales (44%), compared to its rivals in Singapore. 
  • The high fresh produce mix – together with its low-cost, mass market positioning – has given it a greater competitive edge against the online players.

Further gross margin expansion from distribution centre.

  • The construction of the new extension is now expected to add 20% more storage space to the existing facility. Sheng Siong is also making efforts to increase the level of automation in the new extension. We note that it aims to complete the extension before the Lunar New Year sale in FY19, which would allow it to handle more bulk amounts.
  • The additional capacity would also enable the group to handle a higher store count, do more direct-sourcing, and get more suppliers’ rebates as a result.

Venturing into China.

  • Sheng Siong has opened its first store in Kunming, China. As at 1Q, the store has seen decent traction, generating around SGD1.7m of sales and a net loss of SGD0.1m.
  • Its CEO, Mr Lim Hock Chee, sees growth potential in the niche market and indicated that there is a possibility of opening another store in the same city next year to build scale.

BUY, with a Target Price of SGD1.18 based on a blended DCF and P/E valuation.

  • We like the group’s strong cash flow-generative model, and management’s track record in execution. 
  • At its current Sheng Siong share price, the stock offers a dividend yield of 3.7%.

Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-21
SGX Stock Analyst Report BUY Maintain BUY 1.180 Same 1.180