Singapore Grocery Retail - DBS Research 2019-02-01: Tough Online Space Landscape To Benefit Brick & Mortar Players

Singapore Grocery Retail - DBS Group Research  | SGinvestors.io SHENG SIONG GROUP LTD (SGX:OV8) DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)

Singapore Grocery Retail - Tough Online Space Landscape To Benefit Brick & Mortar Players

  • Changes in online space show difficulties in competing with incumbent brick and mortar players.
  • Brick and mortar players may strengthen their presence as online players reorganise themselves.
  • Competition may be keener, but it is still challenging for new smaller players that lack scale to compete.
  • Re-iterate BUY for Sheng Siong; maintain HOLD on Dairy Farm.

Online grocery space in Singapore is undergoing changes

Changes from Honestbee and Lazada.

  • Two recent developments in Singapore’s Grocery Retail Sector –
    1. NTUC Fairprice is ending its partnership with Honestbee and;
    2. Lazada will consolidate its online grocery retail arm, RedMart. into its platform.

Bodes well for brick and mortar players.

  • We believe that there is no reason for both NTUC Fairprice and Lazada to shift away from the status quo if the partnership and parent independent subsidiary arrangement were blossoming. We see the change in Lazada to consolidate operations as an attempt to improve scale and operational efficiency, while the NTUC Fairprice and Honestbee partnership may not have performed to expectations. Based on publicly available information, our initial view is that no changes would have been necessary if both businesses were operating and progressing well.
  • Competition and lack of economies of scale to turn in sufficient profitability may have played a part. These changes in the online grocery space should bode well for brick and mortar players as this implies that changes are needed in the online players’ business models (particularly in the case of RedMart) to better compete. Collapsing some overlapping functions at Lazada and RedMart could lead to cost savings and efficiencies. We note that there is a range of non-food items on RedMart anyway.

More new players but it will be challenging for them to ramp up with their smaller scale

New players without scale may find it difficult to compete with incumbents.

  • Competition in Singapore’s Grocery Retail scene has grown in recent years first with the entry of online grocery retail players such as Redmart and Amazon Prime, sharing the pie with brick and mortar incumbents like NTUC Fairprice, DAIRY FARM INT'L HOLDINGS LTD (SGX:D01) and SHENG SIONG GROUP LTD (SGX:OV8). Evidently, some incumbents are rationalising their operations in the light of the changing landscape such as the planned closure of at least seven Giant outlets by Dairy Farm from 3Q18 to 1Q19. This was followed by Honestbee’s opening its Habitat outlet, a high-tech supermarket that uses mobile technology for consumers to make purchases.
  • While new players may give the incumbents a run for their money, we also note that those without sufficient scale and relationship with key suppliers, will find it difficult to compete profitably.

Smaller players are also opening up new stores albeit at a higher cost.

  • Meanwhile, we observe that smaller players such as Hao Mart are trying to grow their footprint by outbidding their competitors for new HDB supermarket space. We believe that smaller players’ expanding scale such as Hao Mart (which has more than 35 small outlets) will greatly improve their working capital requirements aided by better credit terms provided by suppliers.
  • But we may see lower operating margins in the form of higher rental expenses since these smaller players may have to outbid the competition to secure shop spaces.

Lower number of HDB new outlets in recent quarters, less competition from new players for now.

  • Tenders for new supermarket outlets have somewhat slowed down – with no open tenders in the latter part of 2018 since August. We are aware that HDB is conducting a few closed re-tenders for supermarket outlets that had leases terminated by previous operators. We believe reasons to terminate could range from competition to poor sales, resulting in high costs and low profitability. Nonetheless, HDB is still planning for more new stores in its estates. There are five new supermarkets up for open tender in the next six months and that would benefit players that are still in expansion mode.

Reiterate Buy for Sheng Siong, HOLD for Dairy Farm

Bottom up strategy.

  • We advocate a selective bottom up stock picking strategy due to the existence of competition in the market. We believe challenges faced by new smaller players and in the online space allows incumbents to strengthen their foothold.
  • We prefer Sheng Siong to Dairy Farm as we see the rise of the mass market segment impacting Dairy Farm’s higher end segment and convenience stores.

Sheng Siong (SSG SP, BUY, Target Price S$1.24).

  • We re-iterate BUY on Sheng Siong for its strong presence in offering competitive prices and a large variety of fresh products in the mass market space. Due to these competitive strengths, Sheng Siong still has a stronghold in the mass market store format space despite competition from online and smaller players. Extension of its warehouse which is due to open this year will help to support higher gross margins as well.
  • A minimum of seven newly opened stores in 2018 will also enjoy a full 12 months of revenue contribution this year. We see Sheng Siong as a prime takeover candidate due to its vast store network and logistics chain, especially if online players eventually decide to move offline through acquisitions.
  • Sheng Siong trades at 22x FY19F PE, below regional peer average of 28x (25x excluding Indonesia peers). Our Target Price of S$1.24 including dividend yield of 3.1% offers total return of about 15%.

Dairy Farm (SGX:D01, HOLD, Target Price US$9.35).

  • We are neutral on Dairy Farm and have a HOLD call for now as we believe share price has priced in future growth prospects, including Yonghui’s earnings and the potential value of its stake in Robinson Retail Holdings.
  • Stock is now fairly priced as our Target Price for Dairy Farm based on SOTP is US$9.35, at < 5% upside.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2019-02-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.240 SAME 1.240