Saturday, November 2, 2013

Sheng Siong Group: Higher staff and rental costs limit growth potential of supermarket operator

Sheng Siong Group: Higher staff and rental costs limit growth potential of supermarket operator
Written by Jo-Ann Huang  
Monday, 21 October 2013 15:54
Local supermarket operator Sheng Siong Group has not opened any new stores this year and is unlikely to do so. This means it will fall short of its target to boost its retail gross floor area (GFA) by 10% annually, says James Koh, an analyst with Maybank Kim Eng, in an Oct 10 report.

New store openings have been driving Sheng Siong’s operational performance recently. Last year, it opened eight new outlets, boosting its retail GFA by 52,000 sq ft, or 15%. Now, Koh expects fewer new store openings going forward, leading to limited potential for growth. And in the face of rising competition and costs, Koh believes the stock has become too expensive. “While we admire Sheng Siong as a well-run company with great efficiency, this hardly justifies the stock’s current lofty valuations of 22 times price-to-earnings,” Koh says. He adds that its implied dividend yield of 4% can be achieved elsewhere. Koh has downgraded Sheng Siong from a “hold” to a “sell” with a price target of 58 cents.

Sheng Siong is a “single-market, single-category” supermarket operator in the mature Singapore market, targeting mainly budget consumers, Koh writes. That strategy has proven a hit with shoppers as well as investors, with its share price gaining 18% year-to-date. Targeting budget consumers means it is reliant on locations where rental is low, a factor Koh believes may limit the company from opening more stores.

“The company has been unable to secure new locations year to date. We believe this was due to a lack of low-cost rental locations available as well as increasing competition for space,” Koh adds. He is cutting its store growth expectations to a 5% to 6% increase in GFA from FY2013 to FY2015.

According to Koh, Sheng Siong leases 50% of its GFA from government bodies, HDB and JTC, where rentals are considerably lower than commercial leases. This also subjects Sheng Siong to HDB’s or JTC’s rules, instead of market forces. For example, it was announced on Oct 14 that commercial and industrial tenants in HDB properties will no longer be allowed to assign their premises to another party. Instead, they will have to return the premises to HDB for re-tender if they wish to wind up their businesses. The move is meant to weed out unhealthy speculation and rising assignment fees.

In addition, Sheng Siong’s operating costs look set to rise with the clampdown on foreign workers, which make up a third of Sheng Siong’s headcount. Staff wages amount to 72% of the company’s revenues, Koh notes. “Though Sheng Siong’s current foreign worker proportion is within the newly stipulated 40% from 45% previously, we think there will be impact from the 9% increase in levy as well as indirect wage cost pressures for local workers,” he writes.

At present, Sheng Siong operates 33 stores spanning 400,000 sq ft of GFA. Competitors include market leader NTUC Fairprice as well as Dairy Farm International’s Cold Storage, Jasons Marketplace and Giant. And, competition is intensifying. NTUC has increased its number of 24-hour supermarkets and extended operating hours since 2008. NTUC and Dairy Farm have been expanding their number of hypermarts, while Sheng Siong only has one so far. In 2012, Sheng Siong had 15.7% market share, down from 16.9% in 2010. In contrast, NTUC Fairprice’s share has increased to 48%. Singapore’s market for supermarkets is expected to grow at 3% per annum until 2017.

Such a trend may limit growth for Sheng Siong, which is a single-market operator, according to Koh. Competitors such as Dairy Farm, on the other hand, operate several supermarket brands catering to different segments of shoppers. For example, Jasons Marketplace offers high-end products for more discerning consumers, while Giant is a chain of hypermarts that offers a large variety of products at low prices.

One way for Sheng Siong to deflect competition is to expand overseas. Koh says the company had earlier considered venturing into neighbouring countries like Malaysia and Indonesia, but delayed the move as it had no prior experience in these markets. “The markets in Malaysia and Indonesia are dominated by several big players and it would be an uphill task for the company to muscle in, not to mention the significant execution risks,” he points out. In Malaysia, Mydin Mohamed Holdings Bhd, which operates the Mydin chain of supermarkets, holds a 48% market share, while Dairy Farm holds 12%.

Sheng Siong started out as a provision store run by CEO Lim Hock Chee and his brothers in 1985. The brothers were helping to sell excess pork from their father’s pig farm in Punggol. Lim rented a stall at a grocery store to sell the pork, and when the store ran into financial trouble, he took over. Over time, Lim grew Sheng Siong into a household name selling low-priced fresh produce and groceries. It is also well-known among shoppers for its “wet market” setting within a modern supermarket.

Not all analysts have a bleak outlook on Sheng Siong. In a report dated Sept 26, OCBC Investment Research maintains a “buy” call on the stock with a fair value estimate of 78 cents, despite no new store openings this year. Analysts Lim Siyi and Andy Wong note that Sheng Siong’s 3Q2013, which ended in September, should show revenue bumps from store openings last year. “Typically, new stores take about six months to gain traction and approach a steady state of operations. With four stores opened back in 3Q2012 and another two in 4Q2012, Sheng Siong should still experience revenue bumps from the full-quarter contributions of these stores,” write Lim and Wong. The analysts highlight a possible catalyst in the form of its pilot e-commerce initiative, which is likely to start by 4Q2013.

For now, Sheng Siong is still delivering on earnings. In 2Q2013 ended June, the company achieved a 20.8% increase in earnings to $8.5 million on the back of an 8.7% rise in revenues to $159.8 million. Its gross profit margin grew by 1.3 percentage points to hit 23.2%, owing to the cost efficiencies created by its new Mandai Distribution Centre. As at Oct 16, Sheng Siong’s market value stands at $864.7 million, while its shares closed at 62.5 cents.

Publish date: 21/10/13

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