Broker's take: Maybank Kim Eng resumes coverage on Sheng Siong with 'buy'

MAYBANK Kim Eng in highlighting market-share wins and a potential surge in new stores this year, resumed coverage on Sheng Siong Group with a "buy" call on the stock.

The brokerage noted in a research report that Sheng Siong's share price has underperformed by 10 per cent against the Straits Times Index on excessive concerns about e-commerce disruptions.

But Sheng Siong has posted continued good sets of financial results that support high return on equities and dividends, the report said, noting that the supermarket counter has seen its net margins improve to 8.4 per cent in FY2017 from 6.6 per cent in FY2014.

The brokerage projects that Sheng Siong's revenue will expand 4-5 per cent from 2018 through to 2020 as new stores enter into operations.

Year-to-date, Sheng Siong has already added 32,100 square feet of new retail space that forms 68 per cent of Maybank Kim Eng's forecast retail space for the supermarket counter in FY2018.

Beyond that, Sheng Siong intends to open five new stores each year, yielding combined floor space of 25,000 square feet that should more than make up for the closure of its two largest stores in FY2017.

Citing a Euromonitor study, the brokerage downplayed the e-commerce threat to the growth for supermarket chains in Singapore. The study has concluded that among others, growing demand for hand-picked fresh food continues to support the growth of physical supermarkets. Maybank Kim Eng observed that Sheng Siong has also seen revenue from fresh food expand to 44 per cent in 2017, up from 35 per cent in 2011.

The heat from the rise of e-commerce, though, is felt elsewhere in the grocery retail industry with supermarkets seen as gobbling up the lunch of convenience stores and traditional grocers.

Sheng Siong has increased its market share by 1.2 percentage points to 18.9 per cent from 2014 to 2017 and Maybank Kim Eng hinted at more room for growth.

The brokerage flagged comments from Euromonitor's grocery industry analysts that suggest supermarkets will continue to gain market share partly on the back of expansion in the choices of goods they offer and downsizing of traditional grocers.

It recommends a "buy" on Sheng Siong with a 12-month price target of S$1.20. Sheng Siong last traded at 94.5 Singapore cents as at 11.10am.