Sheng Siong Group

Kim Eng on 6 June 2012

Supermarket trio ensures controlled competition. Sheng Siong Group is one of the top three supermarket operators in Singapore with a market share of 18%, behind NTUC FairPrice and Dairy Farm International (Cold Storage & Shop’N’Save). Together, the trio controls 83% of the domestic market, a predominance which we believe helps ensure stable and controlled competition while barring new entrants which lack economies of scale.

The most efficient player. Sheng Siong may be the smallest player in this tripartite situation but it is the most efficient of the trio, with revenue per sq m 40% higher than NTUC FairPrice. Its asset-light business model carries no debt and enjoys positive cash return cycles. With capex already incurred for a recently completed 543,000 sq m distribution centre, shareholders can look forward to further improvements in operating margins and faster capacity expansion.

Dividend payout to be sustained after FY12. Although Sheng Siong’s 90% dividend payout commitment (for its IPO) ends in FY12, we strongly believe that it will be sustained. The group has a strong net cash position of SGD149m, a defensive business model with positive working capital cycle, free cash flow yield of 8.7% and no major capex requirement in sight.

Growth secured for 2012. Management has secured two outlet spaces which has commenced operations this quarter. They would increase the group’s current store space of 367,800 sq ft by 3.6%. We estimate FY12F-14F recurring net earnings to grow at 8.5% CAGR, driven by steady outlet growth, better utilization in new outlets and improving margins. Given its target of low-to-mid-end mass market, it is also a recession-resilient business.

Initiate with BUY and TP of SGD0.52. We initiate coverage on Sheng Siong Group with a BUY rating and target price of SGD0.52, based on 18.8x FY13F earnings, pegged to Dairy Farm International and applying a 25% discount. Assuming 90% dividend payout, our target price would imply a sustainable forward dividend yield of 4.8-5.4% p.a.