Consumer Staples - CGS-CIMB Research 2018-10-22: Ushering In ‘New Retail’

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SHENG SIONG GROUP LTD (SGX:OV8) DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)

Consumer Staples - Ushering In ‘New Retail’

• We visited honestbee’s new physical and experiential grocery and dining premise Habitat that illustrates the Online-to-Offline (O2O) phenomenon.
• The automated check-out and collection process is a novel idea; and we believe Habitat may pose some competition for other online grocery players.
• We stay Overweight on the consumer sector as this move by honestbee proves that physical retail is still relevant.
• Supermarket results preview – Sheng Siong Group still in growth mode, Dairy Farm International weak.

A visit to Habitat

• Recently, we visited Habitat, honestbee's tech-enabled grocery & dining destination; in Pasir Panjang. We found the experience akin to shopping at an upmarket grocery store (product range seems mid- to high-end); with these exceptions:
  1. the honestbee app is needed;
  2. it is cashless;
  3. general merchandise not displayed on the floor can be ordered via a large in-house honestbee app; and
  4. the checkout and collection (click link for video) processes are automated.
• The location also serves as an event space.

Brick and mortar is not dead, just evolving

• According to news reports, honestbee CEO and founder Joel Sng terms it as 'NewGen Retail'; innovation in retail technology which inspires more consumer engagement for a multi-sensory shopping experience.
• honestbee’s establishment of a physical presence is a concept similar to Alibaba’s Hema supermarket and an illustration of the ‘New Retail’ phenomenon and serves as proof that brick-and-mortar retail will continue to exist but will innovate to stay relevant, as mentioned in our ‘Consumer Staples Sector - Supermarket Sweep’ report in May 18.

Some competition for neighbouring peers

• To a certain extent, we believe Habitat could pose some competition against online food delivery and grocery players like Grabfood and Redmart; given this physical experiential presence could foster consumer awareness and loyalty.
• honestbee said it plans to bring this concept to its eight other markets, i.e. Malaysia, Japan, Thailand, Taiwan, the Philippines, Indonesia and Hong Kong.

Supermarket 3Q18 Results preview – Sheng Siong Group still in growth mode, Dairy Farm International weak.

Sheng Siong (Rating: ADD; Target Price: S$1.26): Still bagging it!

• 3Q is a historically a stronger quarter for Sheng Siong Group. We estimate 3Q18 revenue and net profit grew 6.9%/20.0% y-o-y to S$226m/S$21.5m (+6.3% q-o-q/+25.3% q-o-q) with two new stores opened in Jul 18 (at end-1H18, there were four new stores opened).
• We estimate gross profit margin (GPM) of 26% (3Q17: 25.8%, 2Q18: 27.3%) as Sheng Siong Group pushes sales volumes in the Chinese Lunar Seventh month which occurs in 3Q. We think 9M18 revenue and net profit likely accounted for 75.6% and 77.8% of our full-year estimates respectively.
• The stock is currently trading at 18.6x FY19F P/E; below the 1 s.d. level of 19.1x.

Dairy Farm International (Rating: HOLD; Target Price: S$9.55) – SEA food division malaise will take time to address

• Dairy Farm International typically releases an interim management statement for its third quarter results. We expect the Southeast Asia’s supermarket and hypermarket to continue being the downer to Dairy Farm International’s consolidated earnings given sluggish retail industry in Malaysia and store rationalising mode in Singapore.
• On 27 Sep, a Today Online article in Singapore reported that Dairy Farm is purportedly reviewing the shuttering of three Giant stores -
  1. The Grandstand mall along Turf Club Road,
  2. Block 512 on Bishan Street 13, and
  3. Block 118 on Aljunied Avenue 2.
• This is purportedly after closing 3-4 stores this year inclusive of Junction 10 (~20k sq ft) that will be taken over by Sheng Siong Group (expected opening in Nov 18). Its VivoCity outlet is also officially slated to shut down early next year.
• Dairy Farm International ended FY17 with 102 supermarkets and eight hypermarkets in Singapore.
• On 14 Sep, The Edge Malaysia mentioned that the retail research firm Retail Group Malaysia (RGM) revised its FY18F Malaysia retail sales growth rate forecast down to 4.1% (vs. previous 5.3% estimate released in June), based on its latest quarterly adjustments.
• Dairy Farm Internationall ended FY17 with 61 supermarkets and 80 hypermarkets in Malaysia.
• In 1H18, management guided that there is no short-term fix to its SEA woes; as such we believe that Dairy Farm International remains in major transformation mode for the near term.
• The stock is currently trading at 21.5x FY19F P/E; close to its 1 s.d. level of 21.2x.

Cezzane SEE CGS-CIMB Research | Colin TAN CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-22

SGX Stock Analyst Report ADD MAINTAIN ADD 1.260 SAME 1.260

HOLD MAINTAIN HOLD 9.550 SAME 9.550