Room for Sheng Siong to grow despite e-commerce threat

THE entry of e-commerce players hasn't been quite the market disruptor for the Sheng Siong Group as expected, it seems.

Even as the local supermarket chain made its foray into China with its first overseas store in the fourth quarter of last year, it remains in a position to open even more in Singapore this year.

One reason for the relative insulation is that Sheng Siong's target customers generally aren't the tech-savvy millennials or the shoppers willing to pay a premium for delivery, analysts have pointed out. Its focus on high-margin fresh food, which accounted for 44 per cent of its revenue in 2017, also gives it a competitive edge over rivals.

Here in Singapore, Sheng Siong has the third biggest market share, after heavyweights such as NTUC FairPrice and Dairy Farm, which operates Cold Storage, Market Place by Jasons and Giant.

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While there are no signs of a price war between the online players and retailers of physical stores just yet, UOB Kay Hian analysts say the possibility of e-commerce outfits slashing their prices still remains a threat. "Amazon and RedMart have the pockets to grab market share from brick-and-mortar players by offering big subsidies to consumers," analysts Nicholas Leow and Andrew Chow noted in a report.

Shares in Sheng Siong closed at 94.5 Singapore cents on Tuesday, down 0.5 cent. Its share price has fallen from the near S$1 threshold it was trading at when Amazon Prime Now was launched in late July last year and has yet to recover. Bloomberg data shows that the average 12-month target price of nine analysts for the counter is $1.08.

With an eye on its e-commerce adversaries, Sheng Siong has lowered its dividend payout ratio from 90 per cent to 70 per cent in 2017 to build a war chest. But Nomura analyst Guo Hao Yong is hopeful that it could raise its dividend payout once again from FY19 following the capital expenditure in FY18 owing to the extension of its Mandai warehouse.

Other growth drivers for Sheng Siong in the short to medium term include easing competition from smaller retailers and improved consumer sentiment, which will likely continue to buoy sales for the supermarket sector, analysts say. "Reduced competition from smaller supermarket players has freed up new shop space in recent bidding," wrote Maybank Kim Eng analyst John Cheong, who has a price target of S$1.20, in an April 2 report.

"The HDB is also nearly completing several new housing projects. Sites for bidding have more than doubled to an estimated 20 from three years ago. We expect Sheng Siong to be successful in bidding for three sites of 5,000 square feet each." As at 1Q18, it is adding at least 32,100 sq ft of space from new stores, helping to partly offset the closure of two of its bigger stores last year. For 2019-2020, it aims to open five new outlets per year, spanning 25,000 sq ft in total.

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With a healthy pipeline of new stores expected to materialise, revenue could grow by 4 to 6 per cent for FY18-FY20, Mr Cheong estimates. This also comes as supermarkets in Singapore are expected to continue to wrest market share away from convenience stores and traditional grocers, thanks to round-the-clock operational hours, better accessibility and a wide range of cheaper goods, a Euromonitor study suggested.

For the full year ended Dec 31, Sheng Siong's net profit rose about 11 per cent to S$69.8 million, on the back of a 4 per cent bump in revenue, improved gross margins and tax refunds. Net margin improved to 8.4 per cent in FY17, up from 7.9 per cent in the previous fiscal year.

Outside of Singapore, while it could take some time for its first store in Kunming, China to break even, the venture - if successful - could pave the way for a bigger footprint in the market and an alternate revenue stream.

So though the spectre of a price war remains, the prospect of growth at home, as well as overseas, bodes well for Sheng Siong.