Monday, 19 October 2015

Sheng Siong Group

OCBC on 5 Oct 2015

Managing margins has always been a challenge for the grocery retailing industry. Food retailers in the U.S. have been known to squeeze their suppliers by charging them additional fees for the use of distribution centres and the like. This could inspire grocery retailers in Asia to go to similar extents to increase their margins but they may face challenges in leveraging against suppliers. We like that in Singapore, grocery players like Sheng Siong Group continue to engage in productivity efforts. Also on the e-commerce front, we understand that the major grocery players here still have room for improvement in their e-commerce technology platform as well as order fulfilment rates. Nevertheless, SSG’s management has been strong in their execution, and given their longer-term growth plans in China and the e-commerce space, as well as productivity efforts, we think they will be able to stay competitive for the long run. Maintain BUY, with fair value estimate of S$0.95.

Industry players remain focused on productivity efforts 
Managing margins has always been a challenge for the grocery retailing industry. Earlier this year, an article by Bloomberg News revealed that Walmart was squeezing their suppliers by charging them additional fees for the use of distribution centres, warehouses and the like, but vendors were recently reported to be refusing these charges. While these practices are not new in the U.S., this could inspire grocery retailers in Asia to go to similar extents to increase their margins but they may face challenges in leveraging against suppliers. In Singapore, we like that the grocery players such as Sheng Siong Group (SSG) are engaged in productivity initiatives such as enhancing their warehousing systems or retail formats, and these are supported by the government as well. The second Retail Productivity Plan was launched last month, whereby retailers have been encouraged to adopt manpower-saving technologies such as automated and “cashier-less” stores, as well as invest in upgrading operational capabilities in areas like inventory management. 

Growing importance of e-commerce in driving sales growth
The above-mentioned plan also highlighted e-commerce as a key driver for organic revenue growth. The grocery retailing industry in particular continues to evolve with the e-commerce space and technology advancement in logistics. While the major grocery players have their own online platform, we understand that they are generally trailing behind for their technology platform as well as order fulfilment rates, in comparison to RedMart. SSG’s management is cautiously monitoring their e-commerce performance by controlling their distribution reach to selected neighbourhoods for now, while working towards the desired scale to be cost effective.

Staying competitive in the long term
In addition, with SSG’s China project in mind, we believe these positive longer-term developments coupled with strong management execution will enable SSG to remain a relevant competitor in the industry. Maintain BUY, with fair value estimate of S$0.95. Current price levels offer an expected dividend yield of 4.0% and a total return of ~19%.

No comments:

Post a comment