Singapore Company Focus Sheng Siong Group Bloomberg: SSG SP | Reuters: SHEN.SI DBS Group Research . Equity 21 Mar 2012 HOLD S$0.485 STI : 3,002.73 Buy during sales promotion (Initiating Coverage) • Niche player in a defensive sector, with 90% dividend Price Target : 12-Month S$ 0.49 payout ratio Reason for Report : Initiating coverage Potential Catalyst: Higher outlet/ same store sales growth, M&A • Core FY11-FY13F earnings CAGR of 20%, driven by DBSV vs Consensus: In-line with consensus store expansion, operating efficiencies from new warehouse Analyst Alfie YEO +65 6398 7957 • Current price looks fair at 20x FY12F PE, 1x PEG and a [email protected] c.25% discount to peers given smaller size. Andy SIM CFA +65 6398 7969 • Initiate with Hold, TP S$0.49; would be buyers during a [email protected] sale instead Third largest supermarket player in Singapore. Sheng Siong Group (SSG) is Singapore’s third largest grocery retailer Price Relative with 25 stores and 18% market share behind NTUC Fairprice S$ R e la tiv e In d e x 0.6 and Dairy Farm International. 209 0.6 189 0.5 We 169 Project a 20% core earnings CAGR after dip in FY11. 0.5 149 forecast an EPS CAGR of 20% over FY11-FY13F, driven by 0.4 129 margin expansion and outlet growth. It also generates good 0.4 109 free cashflow of 3-4 Scts per share going forward and higher 0.3 89 A ug-11 N ov-11 Feb-12 dividend yields than peers. We forecast core earnings to taper Sheng Siong Group (LHS) R elative STI IN D EX (R H S) to a more normalize rate of c.5% in FY14F on the basis of Forecasts and Valuation slower outlet expansion. FY Dec (S$ m) 2011A 2012F 2013F 2014F Turnover 578 628 662 696 EBITDA 37 44 47 50 Valuations fair at c.20x PE, 1x PEG and 25% discount to Pre-tax Profit 34 55 47 49 peers; Initiate with a Hold, TP S$0.49. While we like this Net Profit 27 45 39 41 counter for its relative defensiveness, strong operating Net Pft (Pre Ex.) 27 34 39 41 cashflow and potential 6.1% yield, we believe valuations are EPS (S cts) 2.0 3.3 2.8 3.0 relatively fair now. We value SSG at FY12F core earnings of EPS Pre Ex. (S cts) 2.0 2.5 2.8 3.0 EPS Gth (%) (36) 66 (14) 5 20x, a 25% discount to peers and a PEG of 1x, equating to a EPS Gth Pre Ex (%) (17) 25 14 5 TP of S$0.49. Initiate with a HOLD call. Diluted EPS (S cts) 2.0 3.3 2.8 3.0 Net DPS (S cts) 1.8 2.9 2.5 2.7 BV Per Share (S cts) 10.7 11.1 11.3 11.6 A buyer at lower price instead. Notwithstanding our PE (X) 24.6 14.8 17.2 16.3 current recommendation, we would turn buyers at a lower PE Pre Ex. (X) 24.6 19.7 17.2 16.3 share price, barring changes to our forecasts. We still like this P/Cash Flow (X) 23.0 7.7 13.9 12.8 counter for its relative defensiveness, strong operating EV/EBITDA (X) 14.8 11.7 10.6 9.9 Net Div Yield (%) 3.6 6.1 5.2 5.5 cashflow, potential yield and its niche positioning. We believe P/Book Value (X) 4.5 4.4 4.3 4.2 at S$0.40, valuations would be palatable at PE of c.14x/16x on Net Debt/Equity (X) CASH CASH CASH CASH FY12F/ 13F earnings, and a dividend yield of 7.4% and 6.3%, ROAE (%) 28.4 30.1 25.1 25.8 respectively. This equates to an attractive PEG of c.0.7x. Consensus EPS (S cts): 3.0 2.9 3.5 Other Broker Recs: B: 3 S: 2 H: 2 At A Glance Issued Capital (m shrs) 1,384 ICB Industry : Consumer Services Mkt. Cap (S$m/US$m) 671 / 535 ICB Sector: Food & Drug Retailers Major Shareholders Principal Business: Retailer principally engaged in operating the SS Holdings (%) 34.6 Sheng Siong Groceries Chain. Lim Family (%) 36.9 Free Float (%) 28.5 Source of all data: Company, DBS Vickers, Bloomberg Avg. Daily Vol.(‘000) 10,359 www.dbsvickers.com Refer to important disclosures at the end of this report ed: MY / sa: JC Company Focus Sheng Siong Group Investment Summary SSG enjoys a market niche with its unique positioning Target to achieve 40 outlets One of the largest supermarket retailers. Sheng Siong Group Target to operate a total of 40 outlets over time. (SSG) is one of Singapore’s largest retailers principally Management has a target to ultimately operate 40 stores or engaged in operating the Sheng Siong Groceries Chain, with more. However, there has been no commitment on the 28 stores across Singapore. It is the third largest grocery retail timeline to achieve this target. Based on our preliminary chain including hypermarkets, supermarkets, convenience analysis of supermarket stores in Singapore, there could be stores, wet markets and other specialty stores, (after NTUC room for another 67 or 35% more supermarkets located in and Dairy Farm’s Shop & Save) in Singapore and the second the heartlands. Population catchment per supermarket store largest in the supermarket category (after NTUC). SSG has within HDB estates has yet to match those of matured ones. 17.5% market share by revenue in 2010 behind NTUC SSG is adding one more outlet (2,000 sqft) in 2Q12 and is (46.0%) and Dairy Farm (20%) in the Singapore supermarket currently in final negotiations for three more outlets space. (combined 31,500 sq ft). A supermarket with niche positioning. SSG has its own A possible target but could take time. We believe that it is market niche, where customers can purchase products not far-fetched for SSG to achieve its 40 store target, though available in a wet market shop outside of wet market the time taken to achieve it will be a key uncertainty. In our operating hours (typical in the morning only). SSG’s strategy view, we find that it has the most potential to add stores in is to focus on the heartlands as more than 80% of the the western and north-eastern parts of Singapore. SSG can Singapore population resides in HDB public housing. SSG is also fill the demand for wet produce by offering the sale of popular among consumers mainly for its wide product fresh produce late into the night. varieties, especially fresh produce, and competitive pricing. Midterm drivers – Potential for re-rating if Malaysia business Looking for growth in a stable market model proves to be successful New warehouse to cater for store expansion. SSG’s new Potential to re-rate if Malaysia expansion succeeds. With the Mandai Link warehouse and distribution centre centralises its Singapore market being competitive, SSG has planned for warehousing and distribution activities throughout its store expansion in Malaysia. Management has indicated that its network. The warehouse, which is more than four times immediate target is to establish supermarkets in Johor. It has, larger than its previous warehouse at Marsiling, will be able however, indicated that it will not compete in the to cater to higher volume and distribution needs for future hypermarket space as Malaysia already has Carrefour, Jusco, store expansion. SSG can now warehouse approximately Tesco and Giant. Instead, it will be replicating its existing 50% of its inventory at the distribution centre, significantly operating model to take advantage of its strength in fresh more than its Marsiling warehouse previously. Furthermore, produce in Johor Malaysia. SSG will enjoy 1) economies of scale from higher operational efficiency in terms of manpower, transportation and fuel Long term price catalyst – Potential takeover target costs; and 2) lower COGS from more bulk purchases. A takeover target, but only in the longer term. We view SSG Improving operating efficiencies that will enhance margins as a long-term M&A target given its decent network, strength and bottom line growth. Inventory systems at SSG’s Mandai in fresh produce business and logistical infrastructure. In our Link warehouse and distribution centre will help to run view, interested parties would likely be strategic trade players, operations more efficiently and facilitate sound inventory such as the current incumbents. We believe competition management to achieve operational efficiencies and cost could be motivated by the opportunity to consolidate the reductions. Other margin enhancing measures include highly competitive business. However, in our view, there negotiating for better purchase terms and prices with should be little motivation for any deal to be struck for now suppliers, and direct sourcing. We believe that such as 1) regional players will view the Singapore grocery retail efficiencies will aid in margin expansion as it ramps up its market as too small and saturated; 2) SSG is not an attractive store count. standalone target for private equity investment at current valuations. SSG is therefore realistically a longer term M&A target. Page 2 Company Focus Sheng Siong Group Limited upside, Initiate HOLD TP S$0.49 A cashflow generating business Valuation at a discount to peers is justified. SSG currently Generates positive working capital… We like SSG for its cash trades at 19.7x FY12F PE, a c.25% discount to its listed peer generating abilities. SSG purchases inventory from suppliers average of 26x. We believe that valuation at a discount to on credit while selling for cash.