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Breakdown: The Consumer Bull And Sheng Siong
Breakdown, Tradeable | 09 April 2013
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By: Simeon Ang
Articles (125) Profile

When expatriates mention that Singapore is a consumer’s paradise, they might not have been very accurate. The truth is, given Singapore’s size (we are no China), the potential of domestic demand has never been very high.

This is clearly evident as the FTSE Straits Times Consumer Services Index, a barometer of consumer counters listed on the Singapore Exchange, has always trailed the broader Straits Times Index.

However, 2013 has been a somewhat auspicious year for the consumer index. Since the beginning of the year, the FTSE Straits Times Consumer Services Index have notched ahead of its bigger rival, the Straits Times Index.

Source: FactSet Research Systems, graph comparing the returns of the FTSE ST Consumer Services Index (Orange) versus the Straits Times Index (Blue)

With the consumer sector doing so well, one counter stands out as a probable safe bet. Sheng Siong Group has received mostly favourable reviews from analysts as evidenced by the table below.

Source: FactSet Research Systems, table depicting analysts’ call on Sheng Siong

Let’s see what analysts from the four main brokerage houses have to say about Sheng Siong as well as the consumer services sector.

Lim Siyi and Andy Wong of OCBC Investment Research felt that the consumer sector’s valuations have improved dramatically since the lows brought on by the 2011 European Debt Crisis. However, the index’s “ascent” seems to have been a bit too quick for their liking. Both Siyi and Andy feel that caution should be exercised in this aspect. However,

“We continue to like (Sheng Siong) for its defensive qualities i.e. healthy operating cash flows, zero debt, and resilience in the face (of) economic uncertainties.”

Also, owing to its zero debt and strong cash balance of about $120 million as at 31 December 2012, there is a perception that Sheng Siong could well expand beyond its 10 percent target expansion of retail store space.

Siyi and Andy’s Call: BUY, with target price of $0.69 (potential upside of 4.5 percent*)

With the recent rebranding of all 57 Shop n Save stores as Giant Stores, analysts from CIMB feel that Sheng Siong’s strength in the budget segment has been highlighted. Kenneth Ng and Lee Mou Hua opined that the rebranding by Dairy Farm spoke of the troubles that group faces with the Mandarin speaking, budget conscious consumer (coincidentally, this group of consumers identify with Sheng Siong better).

“We are now more positive on Sheng Siong, given evidence of its dominance in the budget segment. The beauty of a low-margin strategy is that it is improbable a new entrant can muscle in by undercutting price.”

Kenneth and Mou Hua’s Call: OUTPERFORM, with target price of $0.75 (potential upside of 13.6 percent*)

Even though Sheng Siong operates from a position on strenght, another recent initiative by the group showed that Sheng Siong was not ready to rest on its laurels. Alison Fok of Maybank Kim Eng notes that Sheng Siong intends to launch its e-commerce platform in 1H13.

Although not a first mover to online retailing, Sheng Siong’s move is nonetheless seen as a step in the right direction. She writes,

“We expect the online channel will take at least a couple of quarters to gain momentum and will be rolled out progressively by district.”

Alison goes on to say that her call on the counter is mainly due to its healthy 2013 growth as well as an anticipated 4+ percent yield* underpinned by a 90 percent fixed payout for the next two years.

Alison’s Call: BUY, with target price of $0.70 (potential upside of 6.1 percent*)

All is not a bed of roses for Sheng Siong though. As Melissa and Terence from OSK Research notes that Sheng Siong is still looking for a partner to expand in Malaysia.

According to Malaysian law, foreign firms need to have a local partner to take up a 30 percent stake before they can commence operations. With domestic retail sales figures remaining uninspiring (4Q12 retail sales value fell 0.8 percent after excluding the motor vehicles component), Sheng Siong’s bid to expand overseas could have hit a minor hiccup.

More importantly though, Melissa and Terence feel that Sheng Siong’s valuations appear “rich” even though they feel that the company’s management will be able to execute expansion plans both locally and abroad.

Melissa and Terence’s Call: NEUTRAL, with target price of $0.69 (potential upside of 4.5 percent*)

With consumer services appearing to have hit the throttle a bit too many times, could valuations indeed be rich as what Melissa and Terence espouse? Or could counters such as Sheng Siong have more room for growth?

Perhaps, the counter’s fundamentals speak plainly for itself. Strong operating cash flows, zero debt as well as a nice 4+ percent dividend yield* expected for the next two years. Isn’t that quite sufficient for an investor to dole out the dough?

* Based on Sheng Siong’s closing price of $0.66 on 8 April 2013.

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

Sheng Siong Group  1.180 -0.010 -0.84%   
Business: Co is a supermarket chain operator.

Insight: Apr-19, 1Q19 revenue rose 10.1% to $251.4m mainly ... Read More

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