SINGAPORE (Feb 7): Sheng Siong’s share price may have underperformed following news about the stiff competition it faced in the Housing Development Board (HDB) commercial rental market and falling same store sales growth, but RHB Research believes it remains a viable investment among consumer stocks.
RHB’s analyst Juliana Cai notes that the closure of its Woodlands and The Verge outlets could be mitigated by the maturing of its nine outlets opened in 2015, the reopening of its Loyang Point outlet and the expansion of its Tampines Central outlet.
While competition has risen in the HDB commercial renting market, with smaller supermarket and minimart chain operators bidding at higher prices of up to $20.65 psf, Cai believes it is unsustainable.
She points out that NTUC FairPrice and Sheng Siong typically secure their outlets at much lower rental rates and were only able to attain operating margins of 5.9% and 8.7% respectively in 2015.
“Given the lower sales volumes of these smaller players, we believe they would not be able to achieve the same level of efficiencies or bargain for as much rebates from suppliers. Hence, we expect the stiff competition in the HDB commercial rental market to taper off in 2H17,” she writes in a note on Tuesday.
On top of that, Cai believes there is still room for Sheng Siong to grow its margins, given that its distribution centre is just 75% utilised, which means it still has space capacity for bulk handling. At the same time, the weaker consumer spend means the group could negotiate for better rebates from its suppliers which would boost margins further.
Furthermore, the group continues to boast a strong cashflow and a stable dividend yield of 4%.
RHB has maintained its “buy” recommendation for the stock with a target price of $1.21.
Shares in Sheng Siong are trading lower at 94.5 cents on Tuesday.
