Singapore | Consumer Staples

Asia Pacific Equity Research

SHENG SIONG GRP | BUY MARKET CAP: USD 866M

5 Oct 2015 Company Update

AVG DAILY TURNOVER: USD 1.6M

POSITIVE LONGER-TERM GROWTH EFFORTS 

Grocery retailing industry continues to evolve E-commerce has room for improvement Management execution has been strong

 

BUY (maintain) Fair value

S$0.95

add: 12m dividend forecast

S$0.03

versus: Current price

S$0.83

12m total return forecast Analysts

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.

Jodie Foo (Lead) ● +65 6531 9809

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 ecommerce performance by controlling their distribution reach to selected neighbourhoods for now, while working towards the desired scale to be cost effective.

GICS Industry Top shareholder

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%.

zKey financial highlights Year ended 31 Dec (S$m) Revenue

FY13

FY14

FY15F

FY16F

687.4

726.0

771.0

840.4

-529.2

-550.3

-582.9

-634.5

Gross profit margin (%)

23.0

24.2

24.4

24.5

Net profit

38.9

47.6

54.1

59.6

2.8

3.2

3.6

4.0

na

na

3.8

4.1

5.7

6.6

7.0

7.1

NTA per share (SG cents)

10.8

15.7

16.0

16.3

ROE (%)

25.8

24.7

22.7

24.5

3.2

3.6

4.0

4.4

Cost of sales

EPS (SG cents) Cons. EPS (SG cents) Adj. Net profit margin (%)

Dividend yield (%)

19%

[email protected] Eugene Chua ● +65 6531 9678 [email protected] Key information Market cap. (m)

S$1,240 / USD866

Avg daily turnover (m)

S$2.3 / USD1.6

Avg daily vol. (m)

13.5

52-wk range (S$)

0.615 - 0.93

Free float (%)

34.2

Shares o/s. (m)

1,503.5

Exchange

SGX

BBRG ticker

SSG SP

Reuters ticker

SHEN.SI

SGX code

OV8

GICS Sector

Relative total return

Consumer Staples Food & Staples Retailing SS Holdings - 32.4% 1m

3m

12m

Company (%)

-3

0

23

STI-adjusted (%)

0

14

34

Price performance chart

Sources: Bloomberg, OIR estimates

Industry-relative metrics

Note: Industry universe defined as companies under identical GICS classification listed on the same exchange. Sources: Bloomberg, OIR estimates

Please refer to important disclosures at the back of this document.

MCI (P) 005/06/2015

OCBC Investment Research Singapore Equities

Company financial highlights

Income statement Year ended 31 Dec (S$m) Revenue Cost of sales Distribution costs Administrative expenses Net other operating income Operating profit Net finance income Profit before tax Income tax expense Net profit

Balance sheet As at 31 Dec (S$m) Bank and cash balances Property, plant, and equipment Other assets Total assets Debt Current liabilities ex. debt Non-current liabilities ex. debt Total liabilities Shareholders equity Total equity and liabilities

Cash flow statement Year ended 31 Dec (S$m) Op profit before working cap. chg. Working cap, taxes and int Net cash from operations Purchase of PP&E Other investing flows Investing cash flow Financing cash flow Net cash flow Cash at beginning of year Cash at end of year

Key rates & ratios EPS (SG cents) NTA per share (SG cents) Gross profit margin (%) Adj. Operating profit margin (%) Adj. Net profit margin (%) PER (x) Price/NTA (x) Dividend yield (%) ROE (%) Debt/equity (x)

FY13

FY14

FY15F

FY16F

687.4 -529.2 -4.2 -111.0 3.5 46.5 1.7 47.6 -8.7 38.9

726.0 -550.3 -4.3 -117.4 2.8 56.8 2.0 57.7 -10.1 47.6

771.0 -582.9 -4.6 -124.9 6.2 64.8 1.7 65.5 -11.5 54.1

840.4 -634.5 -5.0 -136.1 6.7 71.4 1.6 72.3 -12.6 59.6

FY13

FY14

FY15F

FY16F

99.7 90.8 57.8 248.2 0.0 96.2 2.3 98.5 149.8 248.2

130.5 160.7 53.9 345.0 0.0 106.5 2.2 108.7 236.3 345.0

114.5 174.1 64.0 352.5 0.0 109.6 2.3 111.9 240.6 352.5

120.6 186.9 63.4 371.0 0.0 123.1 2.5 125.6 245.4 371.0

FY13

FY14

FY15F

FY16F

56.4 -11.3 45.1 -26.3 1.3 -25.0 -40.8 -20.7 120.4 99.7

67.7 4.0 71.7 -80.9 1.1 -79.9 38.9 30.8 99.7 130.5

76.3 -18.4 58.0 -25.0 0.8 -24.2 -49.7 -16.0 130.5 114.5

83.6 1.6 85.2 -25.0 0.8 -24.2 -54.9 6.2 114.5 120.6

FY13

FY14

FY15F

FY16F

2.8 10.8 23.0 6.8 5.7 29.3 7.6 3.2 25.8 net cash

3.2 15.7 24.2 7.8 6.6 26.1 5.2 3.6 24.7 net cash

3.6 16.0 24.4 8.4 7.0 22.9 5.2 4.0 22.7 net cash

4.0 16.3 24.5 8.5 7.1 20.8 5.1 4.4 24.5 net cash

Sources: Company, OIR forecasts

Company financial highlights

OCBC Investment Research Singapore Equities

SHAREHOLDING DECLARATION: The analyst/analysts who wrote this report holds/hold NIL shares in the above security.

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RATINGS AND RECOMMENDATIONS: - OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading oriented. - OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. - As a guide, OIR’s BUY rating indicates a total return in excess of 10% based on the current price; a HOLD rating indicates total returns within +10% and -5%; a SELL rating indicates total returns less than -5%.

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Carmen Lee Head of Research For OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd

Important disclosures

Published by OCBC Investment Research Pte Ltd