Shopper360 Limited - Phillip Securities 2018-06-13: The Key To Win Consumers’ Dollars

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SHOPPER360 LIMITED SGX:1F0

Shopper360 Limited - The Key To Win Consumers’ Dollars

• Contracts from new and existing clients, and expanded media portfolio would drive FY19e earnings; Expect Core earnings to grow at 20% p.a. in FY18-19e.
• First mover advantage in Southeast Asia’s final frontier via strategic partnership with Myanmar’s leading modern retail chain.
• Initiate with a TRADING BUY with target price of S$0.33, based on estimated 14.0 RM cents FY19 EPS (4.70 SCents) and forward PER of 7.0x. This implies an upside of 87.0% (with dividends) from its last closing price. Undemanding valuations with adjusted trailing-PE of 5.8x, vs global peers’ 13.0x.

COMPANY BACKGROUND

• shopper360 Limited is a well-established shopper marketing services provider in the retail and consumer goods industries in Malaysia with 30 years of experience in the in-store advertising industry.
• It has a strong client base of local and multi-national customers including Nestle, Colgate- Palmolive, F&N Beverage, Fonterra, Samsung, U Mobile and Huawei; and strong network of retail partners such as Giant, Cold Storage, Econsave, The Store, Billion, MYDIN, Aeon, and convenience chain store such as 99 Speedmart, as well as pharmacy chains.

BUSINESS OVERVIEW

• shopper360 Limited is a well-established shopper marketing services provider in the retail and consumer goods industries in Malaysia with 30 years of experience in the in-store advertising industry.
• It maximizes reach to shoppers, increases brand awareness for its customers, and enhance the entire shopper journey, converting shopper to buyer, as well as to build in loyalty, retention and repeat purchase.
  • A customer buying process describes the journey a consumer goes through before purchasing a product or services.
  • A consumer can purchase directly from the brand (supplier) or a retailer (the brand’s distribution channel).
  • In a competitive climate, it is crucial to maintain an active and healthy name, as well as to develop a loyal customer base.
  • A brand/retailer would typically engage four agencies to market to final consumers
    1. Below the line advertising, which involved samplings activities and events management, and brand activation.
    2. Media agency, which bundles media channels (or advertising mediums) and brands.
    3. Creative agency, which creates the designs for branding and provides visual content.
    4. Digital agency, which provides screen-based products and services.

The one-stop solution for brands and retailers

• shopper360 comprises 3 main segments that capture the entire value chain:
• In-store advertising and digital marketing
  • Pos Ad Media: Entice shoppers through strategic point of sales media format.
  • Shopper+: Connect with shoppers O2O (Online to Offline and vice versa) using insight, tech and creative marketing.
• Field force management
  • Jump Retail: Manage customers’ field force to provide brand visibility and product presence in-store.
• Sampling activities and events management
  • Tristar Synergy: Engage shoppers at a personal level by organising in-store sampling and promotional booths as well as events and roadshows.
  • Gazelle Activation: Excite shoppers and consumers with the best of brand experience through activation.

COMPETITIVE STRENGTH

1. “One-stop” shopper marketing services group that connects customers with its retail partners

• Able to provide a full suite of advertising, marketing and shopper engagement services.
• Understands the needs of both shoppers and retailers (both brands and retail partners), the Group can provide a more comprehensive and customised solution to reach optimal results (higher outreach to shoppers, greater visibility of the products, thereby optimising sales for its customers).
• Provide consultation supported by in-house research.

2. 30 years of experience in the in-store advertising industry

• Pos Ad is the pioneer in in-store advertising in Malaysia since 1986.
• Jump Retail is one of the leading retail field force management companies in Malaysia.
• Experienced management team.
• Strong brand equity. Accolades include twice the winner of Enterprise 50 award, and Top 10 in SME100 2014’s Malaysia Fast Moving Companies.

3. Strong network of retail partners

• Retail partners comprising hypermarkets and supermarkets such as Giant, Cold Storage, Econsave, The Store, Billion, MYDIN, Aeon, and convenience chain stores such as 99 Speedmart, as well as chain pharmacies.
• Giant and 99 Speedmart have been its partner for more than 5 years.
• Access to in-store advertising space in over 1,900 retail outlets across 183 towns in Malaysia (as at 17 May 2017).

4. High retention rates of customers and a wide client base in Malaysia

• Clientele expanded over the years from local customers in the FMCG (Fast Moving Consumer Goods) industry to local and MNC customer in both FMCG and non-FMCG industries, including F&B, personal care, home care, telecommunication, technology and pharmaceutical.
• Its current client base of local and multi-national customers includes Nestle, Colgate- Palmolive, F&N Beverage, Fonterra, Samsung, U Mobile and Huawei.
• Nestle has been a long-standing customer since 2002.

Investment Thesis – Steady and visible revenue stream, with earnings growth potential

1. Expecting stronger FY19 earnings from higher margin contracts

(a) New projects with higher margin to be executed in 2HFY18 and into FY19

• Awarded the media concession rights for Shell (one of the largest petrol-mart chain in Malaysia) and MyNews (one of the largest retail convenience store chain in Malaysia).
• These ramped up its in-store advertising network coverage by over 50%. Its retail advertising channel increased from 1,900 to 2,900 outlets.
• Expanded sampling activities beyond FMCG and in-store sampling into out-of-store sales promoters for one of the largest telecommunication companies in Malaysia.
• Secured c.40% of order books from existing clients by end 1HFY18. These contracts will be executed in 2HFY18 to 1HFY19.
• 1HFY18 Revenue +6% y-o-y but PBT -21.0% y-o-y. However, we believe that the higher margin projects secured would underpin 2HFY18 and FY19e earnings growth.

(b) Healthy pipeline beyond FY18

• Cross-sell its existing range of services, provide a cost efficient solution to customers and enable them to streamline their process. shopper360 could offer both above the line (non-targeted, wide reach) and below the line (one-to-one, close touch) marketing strategies to its existing clients.
• Expansion of clients’ business also underpins the demand for marketing services. For example, 99 Speedmart has reached its 1,000 stores milestone in 2017 and targets to reach 2,000 stores in the next 3 to 5 years.
• Continue to acquire new FMCG customers as well as to increase non-FMCG clientele base. Broaden their exposure to different categories of products, such as personal care and beauty products by end-2018.
• Extend its retail advertising network to shopping malls by end-2018. Additionally, the Group aims to add more media space in convenience stores and neighbourhood supermarkets. This is to ride on the shift in consumer preference for proximity shopping and industry move towards smaller format stores.
• Provision of new services, such as expansion into digital and OOH (out-of-home) channels, as well as more providing value-added services. Value-added services, such as market insights, retail consultation, and customised solutions to cater to customers’ requirements. These services could command a premium, thus lifting its margins.

2. Foray into new geographical locations, in particular, Myanmar and Singapore by end-2018

• With minimal CapEx (capital expenditure), the Group can replicate its Malaysia business model into new geographical locations.
• Also, the Group could leverage on its Malaysian network of clients to win clients such as Asahi, Nestle, Universal Music, 99 Speedmart and Spotify outside of Malaysia.

(a) First mover advantage in Myanmar - 

• Golden opportunities in the Golden land
  • Change in socio demographic, including rising consumer affluence and higher education level, have led to more sophisticated clientele. Consumers are increasingly leveraging on the various source of information before making their purchasing decisions.
  • Currently, word-of-mouth is the most common advertising medium in Myanmar. Meanwhile,
    1. Higher internet and mobile penetration rates;
    2. Urbanization and shift towards modern trade channels; and
    3. Improving infrastructure and logistics network,
  • would bring a structural change to this underdeveloped retail landscape.
  • We believe this provides an opportunity for the Group to ride on this tailwind. Higher demand but underserved market imply higher take-up rate for and more room to grow.
• 60:40 JV with Pahtama Group Co., Ltd. (since Nov-17) allows the Group to capitalize on Myanmar’s potential.
  • Pahtama Group is one of the largest and fastest growing distribution companies in the FMCG sector in Myanmar. It has have over 30,000 accounts covered with 1,000 employees nationwide.
  • Under the JV (Joint Venture) agreement, Pahtama Group will grant the JV Co., a right of first and last offer to outsource all of its marketing, advertising and promotional opportunities and/or projects to the JV Co. It will also share its clientele and customer profiles with the Group.
  • Highly scalable with low CapEx. The Group intends to bring the full suite of services into Myanmar. It has established a sales office in Myanmar with 2 sales person, with capital outlay of US$30,000.
  • A seamless entry for sampling and promoter activities in Myanmar. The JV Co. has been awarded an exclusive in-store advertising concession rights for all 144 City Mart supermarkets.
  • We expect the Myanmar business to start contributing to the bottom line in FY19.

(b) Singapore, a more sophisticated market with advanced marketing capabilities

• While Singapore is a mature market as compared to other countries in the region, it is still an important market to embark on as MNC brands consider Singapore as a platform to build a regional brand image.
• We believe that the main growth driver will come from digital marketing. Thanks to the fast internet connection, as well as high internet and mobile penetration rates, Singapore has a high adoption of digital media. 77% of Singaporeans are active social media users, according to "Digital in 2017" from Hootsuite. 800,000 new users came on board in 2017, +22% y-o-y.
• Ahead of its plan to establish an office in Singapore, it has already secured a creative agency contract with Burger King Singapore. It is also in the midst of approaching other retailers and brands.

3. Digitizing its offerings; poised for the Digital Economy

• While e-commerce still lags in Malaysia (with online sales contributing to c.5% of total retail sales), digital media in Malaysia is expected to continue to grow while traditional media would continue to stay relevant.

(a) Won official media reseller rights for a digital content platform (Spotify in Malaysia) in 1HFY18

• Enhanced its portfolio of media with the addition of digital media to its advertising channels.
• A boost to its media revenue and customer pool expansion. Not only that this would connect shopper360 to a broader non-FMCG clientele base (Spotify’s existing customers), the contract will also provide shopper360’s current customers (mostly FMCG) more opportunities to engage a younger audience.

(b) One app to rule them all

• Shopwave is the Group’s self-developed mobile loyalty program.
  • For shoppers, it is a hassle-free convenient option (it aggregated a group of retailers from a fragmented loyalty programmes landscape into one mobile app). It also enhances shopping experience as shoppers could obtain product information simply by scanning the product’s bar code.
  • For its retailers or brands, the app acts as a digital marketing tool and helps to drive online to in-store purchase. The app sends push notifications to shoppers about special offers and shoppers could purchase the deal in-app to redeem in-store. Its reward program enhances customer loyalty as well as promotes repeat visits.
• It currently offers brands and retailers to white-label and brands their very own loyalty platform using location-based technology. It plans to provide brand owners with the service of reaching shoppers through activation touchpoints (i.e. pop-up stores) using beacon technology.
• The app also enables data collection to analyse consumer behaviour, on which promotion or product appeals to them.

(c) Scaling up its digital and technological offerings on B2B application

• 11% interest on Boostorder, an automated sales ordering system.
  • Boostorder is a cross platform B2B commerce solutions provider. It is a common platform for automated sales ordering which helps customers to accelerate product deployment, promote sales and improve retail experience.
  • The estimated market size in Malaysia for B2B software automation is c.MYR1.3bn with approximately 67,000 active businesses. Boostorder aims to convert at least 1% or RM13.5mn of the market into recurring revenue. Currently, Boostorder processes RM10mn worth of B2B sales orders monthly and helps 12,000 distributors manage and fulfil orders of more than 40,000 SKUs listed on its platform.
• Complementary to its existing proprietary software
  • Clover is the company’s self-developed field force system, which automates operations management, data gathering and reporting. This Field force automation system provides near real-time information and ground reports to drive retail operations and facilitate strategic planning.
  • The Group can now offer end-to-end merchandising and sales services to its clients from Field force management segment. Speed to market and sales optimization become more efficient through data collection from both merchandisers and promoters.
  • The systems also act as business intelligence tools for more insightful and informed decision at the retail floor – not only for the clients but also enhanced the Group’s retail consulting capabilities.

(d) Hype up customers’ experience with latest marketing technology trends

• Customers’ experience matters. By incorporating augmented reality technology, Gazelle Activation offers new and interactive consumer experience, thus effectively increase sales and raise brand awareness.

4. Supportive macro backdrop

• Retail Group Malaysia expects retail sales in Malaysia to grow by 6% in 2018, spurred by post general election euphoria, higher trade and stronger Malaysia Ringgit.

Expects higher demand for marketing and promotional activities.

• Given the increasing need for shopper insights and planning, as well as intensifying competition, both brands and retailers are investing in shopper engagement and experience.
• FMCG (Fast-Moving Consumer Goods) companies are focusing more on sales promotional activities, product innovation and e-commerce to drive growth. Meanwhile, retailers are putting more effort in improving the in-store experience to drive foot traffic into their stores.
• The Group is well positioned to capture the 17mn shoppers in Peninsular Malaysia, via both online and offline. Based on 2016 survey conducted by the Group, it helps its clients to reach out to approximately 7 out of 10 shoppers in Malaysia.

FORECAST ASSUMPTIONS

• We expect the new revenue streams from
  1. Myanmar business operations,
  2. newly acquired media concession rights for Shell, MyNews and Spotify; and
  3. newly acquired contract as the creative agency for Burger King,
• would drive In-store advertising and digital marketing segment. These contracts will also improve its revenue mix, lifting its overall margins and thus its profitability in FY19e.
• On the other hand, we also expect higher headcount in Myanmar and Singapore to weigh on its profitability for In-store advertising and digital marketing. Meanwhile, we believe that competitive pricing would keep margins from Field force management and Sampling activities and event management in check.

VALUATION

• Initiate with a TRADING BUY with a target price of S$0.33, based on estimated 14.0 RM cents FY19 EPS (4.70 SCents) and forward PER of 7.0x. This implies an upside of 87.0% (with dividends) from its last closing price.
• As there are no comparable listed peers in Malaysia and Singapore, we compared it against the ‘Big 4” advertising agencies: Omnicom Group, WPP Group, Publicis Groupe, and Interpublic Group. We applied a 40% discount to its global peers’ average forward PER, considering its smaller operating scale and higher liquidity risk.
• Adjusting for the listing and listing related expenses, it is currently trading at trailing 12M P/E of 5.8, as compared its global peers’ average trailing 12M P/E of 13.0x.
• The Group is flushed with cash, ready for any potential acquisition or expansion opportunities. As at 30 Nov-17, with little debt, it stood at a net cash position of RM13.1mn, representing c.16% of its market cap.
• The Group has no dividend policy, but it pledged to pay out at least 20% of its PATMI in FY17-18. It declared a dividend of 0.3 Singapore cents per share in FY17, implying c.20% payout based on EPS of 1.49 Singapore cents (Note: Adjusted FY17 EPS was at 3.21 Singapore cents). We expect FY18e dividend to be at least double of FY17’s at 0.66 Singapore cents, in view of an improved earnings prospect.

INVESTMENT RISKS

• Intensifying competition and increasing operating costs, especially labour and rental costs could crimp profit growth.
• Dependent on the network size of its retail partners. The Group will not be able to acquire new contracts or customers if it fails to retain or expand its media channels.
• High customer concentration risk. As mentioned, its major customers (e.g. Nestle, Samsung and Huawei) contribute >10% each to the Group’s revenue. Cancellation, termination, or unfavourable renegotiation terms and conditions of concessions, franchises and key contracts could hurt the business operations.
• Foreign exchange risk: SGD against the functional currency of the Group, MYR. shopper360’s operational activities are substantially carried out in MYR in Malaysia.

Soh Lin Sin Phillip Securities | https://www.stocksbnb.com/ 2018-06-13

SGX Stock Analyst Report TRADING BUY Initiate TRADING BUY 0.33 Same 0.33