Sheng Siong Group - Maybank Kim Eng 2019-03-27: Battle Of The Brands


Sheng Siong Group - Battle Of The Brands

Housebrand price competition ignited

  • On 18 Mar 2019, FairPrice announced it would hold the prices of 100 housebrands for 15 months, till 30 Jun 2020. Of these 100 products, more than 50 items’ prices have already been slashed.
  • We evaluate the rising competition and relative standing amongst the supermarket players by comparing sample baskets that consists of predominantly housebrands. The results suggest a possible scenario of basket values shrinking over time, thereby supporting our SELL call on Sheng Siong Group (SGX:OV8), with DCF-based Target Price of SGD0.95 unchanged (7.8% WACC, 1% LTG).

Neck-and-neck pricing implies challenges ahead

  • In our initiation report (see report: Sheng Siong Group - Prefer Purchase At Promo Price), we highlighted the key downside catalysts to Sheng Siong’s share price:
    • a weak macro outlook combined with poor consumer sentiment;
    • changing dining habits that have negative implications on demand for fresh produce; and
    • intensifying competition amongst the supermarket players.
  • The pricing move by FairPrice, Sheng Siong’s key competitor, highlights our concerns on two aspects: shrinking basket values and the increasing difficulty for Sheng Siong to defend its market share.

Worst-case scenario suggests further downside

  • In addition, we did a sensitivity analysis on same-stores-sales (SSS) contributions that includes both FY19 and FY20, as we believe FairPrice’s housebrand pricing decision will also impact the next financial year’s revenue growth. The results suggest that revenue / PATMI growth could weaken to 2.6% / 0.9% y-o-y in FY20E if SSS drops to -1%/-0.5% in FY19/20E. In this worst case scenario, our Target Price would fall by 4% to SGD0.91
  • Our current forecasts assume 0.5% SSS contributions for FY19/20E.

Upside risks

  • Given market leader NTUC FairPrice stated in the press release that the initiative is to “serve to moderate the cost of living by acting as an industry benchmark for prices of everyday essentials” (see link), we expect Sheng Siong and peers to adjust grocery prices accordingly to the new normal.
  • Risk to our call includes better-than-expected new stores and SSS contributions, higher-than-expected number of new stores opened, as well as improved consumer sentiment.

Revenue pressure is on, neck-and-neck race

FairPrice kicks off housebrands price competition

  • Market leader FairPrice announced on 18 Mar, with immediate effect, to freeze a basket of 100 FairPrice housebrand products until 30 Jun 2020. In addition, more than 50 housebrand products that are deemed “everyday essentials” have seen their prices drop by as much as 30%, to ensure all 100 of the selected housebrand products are priced at least 20% cheaper than comparable brands. This, in our view, has intensified the competition amongst the supermarket players as they seek to maintain market share in a muted consumer sentiment environment.
  • In our initiation report, we constructed a basket of items which we believe is representative of most consumers’ frequent purchases. We concluded that on a basket level basis, the price difference between the top two market leaders is indiscernible. In the light of recent developments, we swapped in housebrands and re-evaluated the price differences.

Basket of Staples

  • As not all housebrand items are sold online, we made trips to four supermarkets (Sheng Siong at Junction 9, Cold Storage and NTUC FairPrice at Northpoint City, Giant Hypermarket at Sembawang Shopping Centre) on 24 Mar 2019 to check out the prices. Where possible, we substituted the brands we used in the original basket of items for housebrands. Out of the selected 100 FairPrice housebrand products, two (FairPrice Chicken Flavour Instant Noodle and FairPrice Gold DeluxSoft Bathroom Tissue) products are in our basket. While FairPrice Sunflower Oil 1L is in the price-freeze list, the 2L product (in our basket) is not.
  • Our analysis shows that while there are cost savings (vis-à-vis purchasing 3rd party brands at the same store) of at least 8.0% if consumers switched to housebrands, the greatest cost savings comes from Dairy Farm International (SGX:D01) brands (Giant, Cold Storage) and RedMart. This is because they have housebrands for the essential item body wash (cheaper by 63.9% and 42.2% respectively). Excluding the body wash item, FairPrice yields the greatest cost savings and it is slightly cheaper (2.6%) than Sheng Siong’s basket.
  • For fresh items’ pricing competitiveness, Sheng Siong takes the lead. On a basket basis containing only fresh produce, it is c.0.3%-10.8% cheaper than its peers. For non-fresh items (excluding body wash), RedMart takes the lead in cost savings but FairPrice has the cheapest basket, offering the most attractive value in essential items – instant noodles, liquid detergent and toilet rolls.
  • Given the market leader has started the ball rolling on emphasizing grocery affordability, we believe that Sheng Siong and other supermarket players will price their staple baskets at a new normal, at least until end Jun 2020. In addition, our house is expecting weak 1Q19 GDP at +1.2% y-o-y, vs +1.9% in 4Q18 and +4.7% in 1Q18 (see report: Fleeting Manufacturing Bounce, Expect Weak 1Q19 GDP at +1.2%). The tepid outlook does not bode well for consumer sentiment, which we expect to remain subdued for the rest of 2019.
  • The combination of price competition and weak macroeconomic factors points to an expected shrinking of basket values for the supermarket industry, and we believe Sheng Siong will not be immune to these headwinds.
  • See attached PDF report for detailed price comparison for the basket of items, and also the sensitivity analysis details.

Sze Jia Min Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-03-27
SGX Stock Analyst Report SELL MAINTAIN SELL 0.950 SAME 0.950