Broker's take: Maybank Kim Eng initiates coverage on Sheng Siong with 'sell'

BROKERAGE Maybank Kim Eng has initiated coverage on Sheng Siong Group with a "sell" recommendation and a target price of S$0.95, saying the supermarket chain will not be immune to a slowdown in consumer spending amid an anticipated economic deceleration.

As of 10.30am, shares in Sheng Siong were trading at S$1.06, down two Singapore cents or 1.9 per cent.

Rising e-commerce competition that supermarket players face, and changing dining habits in Singapore that have seen an increased frequency of home-delivered cooked meals, continue to be challenges for supermarket operators, said Maybank Kim Eng.

"Such a trend is detrimental to supermarkets' fresh-produce sales," it noted.

In the report, analyst Sze Jia Min said that in a mature grocery market like Singapore, new store openings are expected to form supermarkets' biggest revenue growth driver. Sheng Siong opened 10 new stores in 2018.

While the Ms Sze expects the new stores to contribute to the 8.4 per cent year-on-year growth in revenue for FY2019 that she forecasts for Sheng Siong, she believes "tepid same store sales contributions and smaller basket values will be drags on subsequent revenue growth".

Sheng Siong's store rollout is also dependent on the availability of Housing and Development Board housing sites, said the analyst.

In its analysis of a sample basket of staple goods, the brokerage found that there was a small price difference between NTUC FairPrice and Sheng Siong and given the proximity of their stores, "we see limited consumer conversion to Sheng Siong when they trade down in an economic downturn".

Maybank Kim Eng acknowledged that its forecast is more conservative than street estimates on new-store sales and same-stores-sales contributions for FY2019-2020.

On March 15, RHB Research Institute analyst Juliana Cai said that Sheng Siong's new store openings are likely to outweigh negative same store sales growth. RHB reinterated its "buy" call on Sheng Siong with a target price of S$1.25, on the high end of the consensus, with the supermarket chain its preferred sector pick.

Risks to Maybank Kim Eng's view include higher-than-expected new store and same store sales contributions due to improved consumer sentiment and reduced competition.