SHENG Siong is a single-market, single-category supermarket operator in Singapore. As the third-largest player in a mature market, there is limited potential for growth on the horizon, barring a significant change in its business strategy. While we admire Sheng Siong as a well-run company with great efficiency, this hardly justifies the stock's current lofty valuations of 22x PE. Implied dividend yield of just 4 per cent can be achieved elsewhere. Downgrade from "hold" to "sell".
Management's previous target was to expand its retail gross floor area by around 10 per cent each year. But to date, there were no new stores and we believe it is now virtually impossible to meet this target in 2013. Even in the next two years, we think this goal will be difficult to achieve. The company's strategy of targeting mainly budget consumers means it is reliant on lower rental locations, an approach we believe is becoming increasingly restrictive.
While expansion into neighbouring countries was mooted as a possibility earlier, Sheng Siong held back as it has no prior experience. Besides, the markets in Malaysia and Indonesia are dominated by several big players and it would be an uphill task for the company to muscle in, not to mention significant execution risks. Management appears to be focusing on growing Internet retailing, but we are uncertain whether that would truly take off.
We are cautious on operating costs, with pressure mounting on staff wages and rental, the two biggest cost components. Though Sheng Siong's current foreign worker proportion is within the newly stipulated 40 per cent (previously 45 per cent), we think there will be an impact from the 9 per cent increase in levy as well as indirect wage cost pressures for local workers. We estimate a 5 per cent increase in staff cost last year would have decreased 2012 profit by 7.5 per cent.
With these challenges, we think the market is too optimistic on Sheng Siong's earnings growth. Imminent downgrades will be a negative share price catalyst as the market factors in lower expansion and higher cost.
Our new TP of S$0.58 is pegged at 19.2x FY14 forecast PE, a 25 per cent discount to regional peers on lower growth potential and overall size.
SELL
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