■ Solid potential for further new-store openings
■ Structural margin improvement trends intact
■ Reaffirm Outperform (2) rating and TP of SGD0.97
We hosted a luncheon in Singapore on 28 October with 6 investors and Sheng Siong’s management.
The discussion focused mainly on:
1) the potential for additional new-store openings, as well as
2) further margin expansion, and
3) its China expansion plans.
What’s the impact:
New-store openings. Following a dearth of new-store openings from end-2012, Sheng Siong has opened 6 new stores since December 2014, taking its store count to 39 currently. Looking ahead, management believes the rental market appears to have softened relative to conditions observed in 2013-14, and sees further opportunities with the upcoming supply of around 25,000 completions of public housing units expected over 2016-17.
Margins trends. Even as the company achieved a 3.2pp improvement in its gross margin between 2Q12-2Q15, management believes there exists room for further margin expansion in the near term. Structurally, it sees the biggest scope for margin improvement from its bulk handling process at its Mandai warehouse, which it targets to improve to 80% of all products (from 60% currently). At the same time, management expects some of the seasonal factors that affected the 3Q15 margin (‘SG50’/Lunar Seventh Month, haze impacting prices of fresh food items, etc.) to recede over the next several months.
China plans. Management appears to have turned more cautious on its expansion plans in China, given the deterioration in overall market conditions over the past year or so. While it is cognisant of the challenging environment for supermarket operators in the country, it believes it will be able to replicate its strategy of gaining market share from more traditional store formats, coupled with a focus on fresh groceries. Management shared that it is currently sourcing suitable locations with strong footfall, and is adopting a prudent approach to ensure it enters the market at a favourable time.
What we recommend:
We reaffirm our Outperform (2) rating on Sheng Siong and maintain our DCF-based 12-month target price at SGD0.97, as we continue to favour Sheng Siong for its quality exposure to a defensive business in the Singapore consumer sector and what we view as an attractive 2015E dividend yield of 4%. An increase in competitive pressures represents a key risk to our view.
How we differ:
Our 2016-17E EPS are 4-11% higher than those of the Bloomberg consensus, which we attribute to our more optimistic view on the company’s new-store openings driving earnings growth. (Read Report)
Source : Daiwa Capital Markets