Sheng Siong Group - DBS Research 2020-01-22: More Bullish On New Store Sales


Sheng Siong Group - More Bullish On New Store Sales

  • New stores driving growth and higher market share for Sheng Siong Group.
  • Outlook remains healthy with recent developments aimed at strengthening operations.
  • Raise FY19-21F earnings by 3-11% on higher sales psf.

Maintain BUY; growth led by new stores.

  • We are more positive on Sheng Siong Group (SGX:OV8) and have raised our earnings forecasts and target price. See Sheng Siong Group Target Price.
  • The performance of Sheng Siong Group’s new stores is encouraging, outperforming in terms of sales and profitability matrices. Given that revenue growth has outstripped market growth for Singapore supermarkets in recent quarters, we believe Sheng Siong Group has gained market share.
  • We have raised our FY19-21F earnings by 3%-11% on the back of stronger than expected performance led by new stores. Maintain BUY with 15% total return including dividends.

Strong performance of new stores has helped Sheng Siong gain market share away from its competitors

Sheng Siong has outperformed supermarket sales and overall general retail sales:

  • Singapore supermarket sales have outperformed overall retail sales (ex-motor vehicles) in recent months. In particular, supermarket sales averaged c.0.8% y-o-y growth in the past nine months as opposed to -1.4% y-o-y for overall retail sales (ex-vehicles).
  • We believe recent months’ retail sales data suggest that spending in Singapore has shifted more to staple food items. This is also validated by more positive retail sales for F&B services during the same period.

Sheng Siong has gained market share:

  • We note that Sheng Siong Group’s revenue growth for 9M19 was 11.1% y-o-y. As this far outstrips market growth of below 1% y-o-y, we believe Sheng Siong Group has gained market share from its nearest competitors such as NTUC Fairprice, Dairy Farm (SGX:D01), and to some extent the traditional wet markets. Indeed, Sheng Siong Group’s 2019 market share for Singapore Modern Grocery Retail has risen to 18% from 16.3% a year ago according to Euromonitor. This compares to just 15% in 2014.

New stores have been driving growth:

  • Sheng Siong Group’s growth has been driven largely by new stores, with 9M19 revenue growth at 11.1% y-o-y, outpacing its flattish quarterly same store sales growth (SSSG). Annualised sales per square feet (psf) has averaged c.S$2,000 for the past three quarters, driven strongly by new stores which are capable of delivering above average sales psf.
  • Sheng Siong Group ramped up its store count by 13 new stores to 57 from 44 at the end 2017, all of which are proving to be strong revenue and earnings drivers. While new stores have been driving growth, stores in older estates have been performing below the average c.S$2,000 sales psf threshold. Still, this is still above the industry average sales psf. These strong numbers have been achieved through a combination of marketing and space management which collectively raises store efficiency.

Outlook remains healthy with recent developments aimed at strengthening operations

Gaining ground against competition.

  • We see two key developments that will help strengthen Sheng Siong Group’s operations this year. Sheng Siong Group recently purchased Block 118 Aljunied Avenue 2 store for S$29.5m from Dairy Farm which formerly operated a Giant outlet there. This sees the exit of Giant and an addition of a new store for Sheng Siong Group in an area in which it is not previously represented. That would help Sheng Siong Group raise market at the expense of Dairy Farm in Singapore.
  • We note that Dairy Farm is undergoing a multi-year transformation plan which includes culling stores’ performance that it feels cannot be improved. Within the middle to low end supermarket sub-segment, we feel that Sheng Siong Group’s operational efficiency, supply chain, product, pricing, layout, variety of fresh offering, marketing and promotion efforts can contribute good sales psf and positively to group profitability going forward.

Geared up for more outlets.

  • Sheng Siong Group’s distribution centre extension at lower Mandai is expected to be operational this year. We believe the higher warehousing capacity will yield greater operating scale to support more outlets going forward and fulfill higher demand during seasonal peak periods such as Chinese New Year and seventh month.

Could Wuhan virus affect earnings and stock price?

Supermarket sales remained resilient during SARS in 2003.

  • With the Wuhan Pneumonia Outbreak gathering steam in the last few days, the question is whether this will ultimately have an impact on the stock price and earnings. Taking reference from the SARS outbreak in 2003 (since the coronavirus is the same type as SARS), our observation from history is that Singapore retail sales for Supermarkets picked up in 2003 during the outbreak.

Supermarket sales stays defensive.

  • Evidently, during a period of epidemic such as SARS in 2003, supermarket sales have remained resilient. If ever this virus worsens, more people staying indoors or within their vicinity could ultimately lead to resilient Supermarket sales, as suggested by historical findings.

Singapore retail sales declined instead.

  • Instead it was Singapore retail sales ex-motor vehicles which declined during the SARS period in 2003. Culling of travel plans (see decline in tourist arrivals at Singapore Changi), avoiding outdoors and staying home for fear of unknowingly catching the virus might have led to decline in retail sales and an increase in supermarket sales.

Maintain BUY, raised our earnings estimates and Target Price

Raised earnings by 3-11%:

  • We turn more positive on Sheng Siong Group, led by stronger performances from new stores.
  • We raised our sales psf assumptions to reflect the strong performance of new stores while expecting old stores sales to remain flattish. Sales psf assumption for FY19F is now pegged to c.S$2,000, with 3-5% increases for the next two years. We have kept gross and operating margin projections largely unchanged as we see no significant change in cost structure going forward.
  • Our net margins however are slightly lowered to account for higher interest cost from more new leases, as a result of IFRS (I) 16 Lease Accounting. The net impact is we have lifted FY19-21F earnings by 3- 11%.

Maintain BUY with higher Target Price of S$1.41.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-01-22
SGX Stock Analyst Report BUY MAINTAIN BUY 1.41 UP 1.320