At current valuations, Sheng Siong Group (SSG) is being priced as a stable, lowgrowth dividend play. Yet with ambitions to expand overseas and a joint venture already set up in China, we think the market is missing SSG’s longer-term growth potential.
We believe SSG stands a decent chance of getting the expansion right, allowing investors a buy-in on the stable Singapore business and an option on its China growth story. We upgrade SSG to Outperform from Neutral, transferring coverage from Sam Chan to Justin Chiam with a new target price of S$1.02 from S$0.88.
• SSG’s Singapore business forms a stable base: The supermarket dynamics in Singapore are relatively stable; market share, profitability and growth lack the vicissitudes of lesser developed countries, and we think it will stay this way. SSG exhibits counter-cyclical investment characteristics. Bolstered by a strong FCF generative model, we expect the dividend payout to continue at ~90%, allowing a yield of 4%. Our DCF-valuation for the Singapore business is S$0.94.
Get the growth free:
• Potential #1 – China foray should not be ignored: SSG is currently exploring a joint venture into Kunming, China. Should SSG get the Chinese market right, we see a valuation upside of S$0.16/sh, and factor in S$0.08/sh as the option premium now. We do not expect the cashflow drag to be significant in the early years.
• Potential #2 – Singapore and immediate neighbours: We are pencilling in 50 stores as the ceiling for the SG market and see potential upside from new site releases. At the same time, we do not expect the China venture to break mgmt’s ambition to grow, and see immediate neighbours as potential candidates should the China venture go awry, albeit on a much longer timeline.
Hallmarks of success; SSG has a decent shot
• We believe SSG’s key success factors lie in
1) its unique retail strategy,
2) deep seated cost-sensitive culture and
3) its ability to evolve and learn as an organization; hallmarks of a successful supermarket chain, in our view.
With mgmts’ ambition to continue expanding, we think SSG is ready to compete in a larger arena.
Upgrade to Outperform; dividends while you wait
At 21x 2016E P/E (vs 24x Asia peer avg), we find value in SSG given its long-term growth story. We have tweaked our earnings forecasts for 2015-17E by -2 to +5%. Our SOTP target price finds upside from both the status quo SG business and its China venture. We continue to expect a div yield of 4% for the next 3 years, supported by its FCF generative model and high net cash position from SSG’s stable Singapore operations. (This Report was published on 06 Oct 2015)
Source : Macquarie Equities Research