Sheng Siong Group:
Fair value S$0.78
add: 12m dividend forecast S$0.02
versus: Current price S$0.66
No new stores not a concern
• 3Q13 results should still show improvement
• Margin stability expected
• Conducive macro environment remains
Although 3Q13 is coming to a close, we are unconcerned by the lack of new store additions by Sheng Siong Group (SSG). While this development means that SSG will be unable to achieve its 10% gross floor area target for the year,
the group should still experience decent top-line growth for 3Q13 from full-quarter contributions of new stores added last year. Furthermore, expected margin stability and a conducive macro environment – more dining-in of consumers and relatively subdued supermarket competition – provide price support for SSG’s share price at current levels. Favouring the counter for its defensive qualities and healthy balance sheet, we maintain BUY with a slightly lower fair value estimate of S$0.78 (S$0.80 previously). A potential catalyst for the counter exists in the form of its pilot e-commerce initiative, which is likely to commence in 4Q13.
No new stores yet
As we approach the end of Sep, Sheng Siong Group (SSG) has yet to announce the addition of any new stores due to keener competition for retail space and the lack of availability in desirable locations. While this development means that the number of SSG stores stays at 33, we expect its share price to remain supported at current levels ahead of its 3Q13 results release.
But 3Q13 should still show revenue bump from new stores
Typically, new stores take about six months to gain traction and approach a steady state of operations. Therefore, with four stores opened back in 3Q12 and another two in 4Q12, SSG should still experience revenue bumps in 3Q13 from the full-quarter contributions of these stores.
Macro-environment remains conducive
Inflation and economic uncertainty remains the top two concerns for consumers, who have indicated in a series of surveys conducted that they intend to cut back on discretionary spending. This is a positive for supermarket spending, which continues to see a greater pace of year-on-year increases in spending vis-à-vis F&B spending. In addition, competition amongst the big 3 supermarket chains has been relatively subdued, reinforcing our view of a tacit agreement to preserve margins.
The lack of new stores sees us lowering our FY13 and FY14 revenue growth to 8% each from 9.5% and 10% previously. However, we expect margin stability to continue, and we favour the counter for its defensive qualities and healthy balance sheet. In addition, a potential catalyst could emerge in the form of its pilot e-commerce initiative, likely to commence in 4Q13. Reiterate BUY for SSG with a slightly lower fair value estimate of S$0.78 (S$0.80 previously).
Publish date: 27/09/13