Sheng Siong Group
Planning to buy stores
▊ Sheng Siong has hinted that it could buy store space due to the difficulty in securing leases in the face of high rental rate demands. This does not mean that it will no longer be leasing stores, but rather it is open to this option in order to secure store space in good locations. We scale down our store expansion assumptions to reflect slower store expansion next year, which reduces our FY13-15 EPS estimates by 3-4%. This trims our target price, which is still based on 23x CY14 P/E (10% discount to Dairy Farm). We keep our Outperform call as this development does not impact ROEs yet. Further earnings delivery could catalyse the stock, led by existing new stores and margin expansion.
In its post-3Q results briefing, Sheng Siong indicated that it is considering buying stores, in addition to leasing them.
What We Think
This will not be management’s preferred mode of securing new store space, but rather an option to consider given the net cash of S$108m on its books, to avoid losing out on good store space. Leasing will still be management’s first option. Although buying stores ties up capital, we are not negative given that 1) ROEs will not decline anytime soon because its cash on hand can possibly fund up to 3 stores of 10,000 sf each. Thus, operating cashflow will not be affected; and 2) we do not think that store purchases will be a frequent occurrence. The current elevated price level for commercial properties is a cyclical phenomenon and unlikely to stay this way in perpetuity. We are cognisant of the need to strike a balance between keeping ROEs high and delivering earnings growth, and we can see why management is considering this option given its cash on hand. At this juncture, earnings growth can still be delivered without sacrificing ROEs. This move is not without precedent, Sheng Siong owned 6 of its stores previously but post IPO restructuring, these assets are now held under E-Land properties.
What You Should Do
We keep our Outperform call as this development does not affect ROEs yet. Moreover, its valuations are undemanding at 19x CY14 P/E vs. peers' 22x CY14 P/E, and are further supported by a 4.8% dividend yield.
Publish date: 25/10/13