SINGAPORE (Feb 19): RHB is maintaining “overweight” on Singapore’s consumer staples sector while highlighting Dairy Farm as its preferred “buy” pick with an unchanged target price of US$9.53 ($12.50) on expectations of consumption to pick up across the ASEAN region this year.
RHB’s positive sector outlook comes on the back of strong retail sales data over 2H17, with supermarkets, in particular, experiencing a good run-up in sales over the last few months of the year.
Moving into 2018, the research house sees improved demand, together with the ramp-up of newly opened distribution centres in Singapore, the Philippines and Malaysia, helping to boost continued earnings improvement going forward.
In a Monday report, analyst Juliana Cai says she expects an uplift in domestic consumption, along with the 2% on-year appreciation of the SGD in 2H17, would bode well for Dairy’s Farm food division, which was the key drag to the group in the first half of the year.
A recent pre-Lunar New Year (LNY) channel check at Chinatown also saw stronger footfall compared to that of last year, in line with RHB’s view of improving consumer confidence.
“We estimate that the Singapore market is contributing close to 20% of [Dairy Farm’s] revenue… Overall, we expect the group’s upcoming results to come relatively in line with our estimates, with the health & beauty division being the key driver of growth,” notes the analyst.
“Moreover, the Hong Kong Retail Sales Index further showed that sales of cosmetics and medicine was up by an average of almost 9% YoY in 2H17. Henceforth we believe the Mannings stores would see an uptick along with the industry trend,” she adds.
Cai also highlights Sheng Siong as an obvious beneficiary of the supermarket sub-sector’s stronger-than-expected sales, given its status as a pure Singapore play.
While RHB thinks Sheng Siong’s 4Q results are likely to come in stronger than previously expected, the research house maintains its “neutral” rating on the stock with a higher target price of 99 cents from 93 cents previously on the basis that the y-o-y sales growth of 60% in its consumer staples division is unsustainable.
This is given the low birth rate and high penetration rate of supermarkets in Singapore, explains Cai, while new supermarket sites located close to existing Sheng Siong stores may eventually see sales cannibalisation when the shift in population to new residential estates slows down.
“The younger households are less likely to shop at wet markets. This factor, together with supermarkets’ push to drive more fresh sales, could be contributing to the recent rise in supermarket sales. Looking ahead, we think the uptick in supermarket sales is likely to continue in January-February. This would be due to pre-LNY sales, before tapering off into the lull period post the festive season,” concludes the analyst.
As at 10:30am, shares in Dairy Farm and Sheng Siong are trading at US$8.39 and 91 cents respectively.
