Sheng Siong will have to secure new supermarket sites for growth

Administrative expenses decreased 0.5% to $33.5 million compared to $33.6 million in 3Q16, due to lower staff cost and rent saved from the closure of the store at The Verge, but was partially offset by higher depreciation charges of $0.2 million.

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See: Sheng Siong posts 25.7% increase in 3Q earnings to $19.7 mil

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Following the results announcement, CIMB is maintaining its “hold” call on Sheng Siong with a higher target price of $98 cents.

The group’s 3Q17 gross profit margin trended at 25.8%, marginally below 25.9% in 3Q16 and 26.6% in 2Q17, due to festive sales during the Chinese seventh month.

The group’s management says that it is looking closely at cost controls, but highlighted that given the keen competition within the supermarket space, significant gross profit margin growth will likely be capped.

The group also expects to sign tenancy agreements for three new stores with total retail area of 20,000 sf in Dec 17, which would help to mitigate the impact from the closure of its Woodlands store in Nov which spanned 41,5000 sf.

In a Friday report, analyst Cezzane See says, “We understand the start-up of its China supermarket (c.54k sf); expected in Sep 17, has been delayed to end of 2017. We understand that 10 more supermarkets are scheduled for tender in the next six months.”

“Whilst y-o-y growth seems intact, we are uncertain how the competitive landscape would be like for new stores in FY18-19F. E-commerce threats, e.g. AmazonPrime could cap margin expansion in the long run,” See adds.

Meanwhile, UOB is also reiterating its “hold” recommendation on Sheng Siong with a target price of $1.06.

With about 10 supermarkets scheduled for tender in the next six months, the group’s irrational supermarket site bidding appears to be over, as its last few winning bids this year have averaged about $12psf compared to what some smaller supermarket players bid for sites for as high as $21psf.

In a Monday report, analyst Nicholas Leow says, “Sheng Siong’s growth in 2018 will mainly be driven by it securing new supermarket sites in areas where it does not have a strong presence.”

According to the analyst, Singapore’s supermarket segment appears to be on a standstill with the top three supermarket players engaging in less promotional activities, while e-commerce players have yet to engage in aggressive market-share grabbing strategies.

Thus, the risk of a price war between Amazon and Redmart remains, which will then cause other brick-and-mortar supermarkets to lower prices.

Phillip Capital on the other hand is upgrading its recommendation on Sheng Siong to “buy” from “accumulate” with a higher target price of $1.13.

The research house views the closure of the group’s two underperforming stores – Woodlands Block 6A and The Verge – as positive as it helps the group save on rent, contribute to lower operating expenses and improve its store productivity.

The group’s one-off gain from the refund of prior years’ taxes of $2.2 million will be distributed back to shareholders via dividends.

However, in the Monday report, analyst Soh Sin Lin says, “Competition remains keen with influx of online retailers; Brick-and-mortar competitors are also driving fresh penetration.”

Sheng Siong’s effort to strengthen its fresh product offerings has also been matched by competitor NTUC Fairprice.

On the outlook, the group’s gross margin is expected to sustain at 26.0% in FY17 and 26.2% in FY18e on efficiency gains derived from the central distribution centre and favourable input prices. The management also says that it is still a buyer’s market for groceries.

The analyst expects group’s new stores opening in end-2017 as well as potential bid wins to drive FY18 growth.

As at 3.00pm, shares in Sheng Siong are trading at 94 cents or 5.19 times Dec-17F book with a dividend yield of 3.34%.