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Broker's Take: DBS sees no Amazon Prime pain on Sheng Siong

DBS Group Research remains positive on Sheng Siong Group, pointing to the supermarket chain's latest pre-tax margin that hit a record high of 9 per cent on strong gross margins, and modest increase in operating expenses relative to revenue growth.

"Despite the opening of Amazon Prime, there was no let-up operationally. In fact, margins and sales parameters grew stronger year-on-year," said DBS.

The better improvement was partly due to closure of the Verge store, which was performing weaker than the rest of the stores. DBS kept its buy rating on the stock, though it trimmed the target price by one cent, to S$1.19.

Sheng Siong on Thursday reported higher third-quarter earnings, lifted by a rise in revenue and a S$2.2 million refund of previous years' taxes. Net profit for the three months as at end-September rose 25.3 per cent from a year ago to S$19.6 million.

RHB Research separately on Friday lowered its target price on Sheng Siong, saying that the supermarket chain may not be able to sustain its growth.

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"We think Sheng Siong's reliance on Singapore market is likely to limit its growth in the long run," said RHB, which lowered its target price to S$0.98 from S$1.05 previously and kept its "neutral" rating.

While Sheng Siong has continued to grow its market share last quarter, it remains operating in Singapore, a mature market.

"We believe the efficiencies derived from the distribution centre have peaked... as such, any future growth in earnings would be dependent on sales growth and potential operating leverage," said RHB.

"Over the next six months, there would be another 10 supermarkets sites put up by HDB for bidding. Currently, we estimate Sheng Siong to win additional four sites in fiscal 2018. Revenue per store however should decline moving forward as a result of cannibalisation amongst the stores."

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