Sheng Siong

OCBC on 14 June 2012

With the rest of the broad market performing poorly in the face of global uncertainty, we deem the proportionally greater sell-off of SSG (-17.3%) to be related to loss-covering as investors use gains from SSG since its IPO to cover other unprofitable ventures. Nonetheless, the sell-offs have resulted in an attractive entry point for SSG, and we base our argument on three main factors: 1) shifting consumer spending patterns towards supermarkets, 2) improving and promising operations supporting our FY12 outlook, and 3) likelihood of an interim dividend. We upgrade our rating on SSG to BUY on valuations grounds with an unchanged fair value estimate of S$0.49.

Sell-offs to cover other losses
The share price of Sheng Siong Group (SSG) fell 17.3% in less than two months from our last report compared to a drop of 6.5% for Singapore’s barometer (FTSE STI Index). With the rest of the broad market performing poorly, we deem the proportionally greater sell-off to be related to loss-covering as investors use gains from SSG since its IPO to cover other unprofitable ventures. Nonetheless, the sell-offs have resulted in an attractive entry point for SSG, and we base our argument on three main factors: 1) shifting consumer spending patterns, 2) improving and promising operations, and 3) likelihood of interim dividend.

1. Shifting consumption habits
With the macro environment remaining shaky, we have seen a drop off in retail sales on a trend basis especially in the F&B services segment. Persistence in this regard will benefit supermarkets as they benefit from a greater number of consumers cooking at home more often.

2. Improving operations
Competition amongst the Big 3 supermarkets has started to ease up as evidenced by a drop-off in the number of items in weekly promotions, and expect gross profit margins to start inching higher above the 21% mark. Furthermore, SSG’s new stores have received favourable responses and are expected to breakeven within a four-month period.

3. High possibility of interim dividend
Management had previously stated its intention to disburse the entire proceeds of a one-time S$10.4m gain from the sale of its old Marsiling warehouse facility to shareholders. We believe that an opportune time for this disbursement has emerged as it would reinvigorate interest in the counter and repay the faith of its shareholders.

Upgrade to BUY
With its FY12 revenue expected to grow unabated and a 90% dividend payout ratio, SSG’s proposition as a quality, defensive play with attractive dividends (FY12F: 6.9%) remains unaltered. As we leave our FY12 projections unchanged, we upgrade our rating on SSG to BUY on valuations grounds with the same fair value estimate of S$0.49.