Sheng Siong Group - RHB Invest 2019-03-15: New Stores To Outweigh Negative SSSG; BUY


Sheng Siong Group - New Stores To Outweigh Negative SSSG; BUY

  • Singapore retail sales should remain muted this year on slowing economic growth. SSSG may see some downward pressure from the increased supply of supermarkets. However, stronger retailers should grow, albeit at the expense of weaker competitors. As such, Sheng Siong Group (SGX:OV8) should outperform its peers, with growth from the 10 new stores opened last year as well as continued GPM expansion.
  • Reiterate BUY on this preferred sector pick, high end of consensus SGD1.25 Target Price, 16% upside with 3% FY19F yield.

Positive retail sales growth in January unsustainable.

  • In January, Singapore’s retail sales index grew 7.6% y-o-y, while retail sales in supermarkets and hypermarkets increased 8.8% y-o-y. We believe the positive growth was largely driven by the earlier occurrence of the Lunar New Year.
  • We expect to see a lull period for sales in February and March, post the Lunar New Year festivities.

Negative SSSG is here to stay in 2019…

  • Retail sales started off on a high note in 2018 – this was led by strong GDP growth as well as a higher wealth effect from property prices and the stock market towards the end of 2017. As GDP growth moderated towards 2019, we believe consumer confidence may have peaked in end-2018. That said, we expect consumer sentiment to be toned down going forward, resulting in muted retail sales.
  • Meanwhile, the sector continues to face competition from online formats and the higher supply of supermarkets. This resulted in Sheng Siong Group booking negative SSSG in 4Q18. We expect SSSG to remain tepid-to-slightly negative for FY19, but growth from maturing new stores should more than offset the decline.

…but this will be more cyclical than structural.

  • We believe negative SSSG is largely cyclical. Consumer sentiment could turn positive if the global macroeconomic outlook improves. The Housing Development Board (HDB) also seems to be slowing in opening up for bids on new supermarket sites. This will give the market more time to adjust to the short-term oversupply.

Sheng Siong is still our preferred pick for the retail staples sub-sector.

  • We like Sheng Siong Group for its bottom-up growth story amidst the more challenging retail environment. Also, the higher proportion of new stores in new residential estates should serve as growth engines, when these property areas mature.
  • Its distribution centre extension should also be ready by this year – which will help improve efficiencies and margins.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-03-15
SGX Stock Analyst Report BUY MAINTAIN BUY 1.25 SAME 1.25