Sheng Siong - RHB Invest 2018-07-13: Defensive Staple Play

SGinvestors.io

SHENG SIONG GROUP LTD SGX:OV8

Sheng Siong - Defensive Staple Play

• Reiterate BUY and new SGD1.27 Target Price from SGD1.18, with 18% upside, as we roll over our valuation to FY19F.
• Top Pick of the sector, we favour Sheng Siong for its defensive nature and steady earnings growth, as the economy moves to the late expansionary phase.
• We expect it to generate a steady EPS CAGR of 10% over FY17-20F, led by increase in store count and gross margin expansion.
• Strong cash flow generating capability should also allow it to support minimum dividend payout ratio of 70%.

Is the high gross margin sustainable?

• Not only do we think it is sustainable, we believe Sheng Siong’s gross margin expansion will remain intact in the medium term. Key reasons:
  1. Sheng Siong is expanding distribution centre by 20% by the next Lunar New Year. The added capacity allows it to grows direct-sourcing and bulk handling capabilities, which translate to higher margins.
  2. Higher sales mix in fresh produce. Over the years, it has established itself as a household name known for quality fresh produce. The wet market industry continues to shrink, in line with changing consumer purchasing pattern, the lack of successors of stallholders and absence of land allocated to wet markets in new housing estates. Hence, we believe it would be a key beneficiary as the go-to place for fresh foods. Fresh produce has much higher gross margin compared to dry goods. The displacement of wet markets would thus be positive for Sheng Siong’s margin expansion in the medium term.
  3. Entrenched players in a small matured market. The Top 3 supermarket operators in Singapore – NTUC FairPrice Co-operative Ltd, Dairy Farm (DFI SP, BUY, TP:SGD9.66) and Sheng Siong – cornered close to 90% of market share. As such, they have strong bargaining power over suppliers and are able to command strong rebates for the suppliers to list their products on the shelf spaces. This report is shared at SGinvestors.io.

Could it keep up with strong sales growth?

• We expect SSSG to track GDP growth in the long run. But this year, Sheng Siong’s SSSG should hover above economic growth, as it is lifted by the expansion of the Tampines outlet, reopening of Loyang outlet, and migration of customers from the closure of The Verge and Woodlands 6A outlets to nearby Sheng Siong stores. YTD, it has also opened six new supermarkets.
• Given that a new supermarket takes three years to ramp up to matured revenue, we believe topline growth will be supported over the next three years. This report is shared at SGinvestors.io.

Top Pick of the sector

• Top Pick of the sector with SGD1.27 Target Price, based on blended DCF and P/E valuation.
• With Sheng Siong’s strong cash flow generative ability, we expect it to accumulate a war chest of > SGD100m cash by end-FY19F. This could prompt management to pay out a special dividend to the investors. This report is shared at SGinvestors.io.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-07-13

SGX Stock Analyst Report BUY Maintain BUY 1.27 Up 1.180