SINGAPORE (May 21): RHB Research says low-cost supermarket chain Sheng Siong Group is its top pick among the consumer retail staples, amid recovering consumer sentiment on the back of improving job prospects and economic growth in Singapore.

“We have slight preference for Sheng Siong on its strong execution track record, high sales mix in fresh food, improving market share in Singapore and potential for gross margin expansion with the distribution centre extension coming up,” says analyst Juliana Cai in a report on Monday.

RHB is keeping its “buy” call on Sheng Siong with a target price of $1.18.

“We believe Sheng Siong is a clear beneficiary of the recovering consumer sentiment in Singapore,” Cai says. “We believe grocery expenditure would remain on an uptrend this year.”

“With an improved economic outlook and consumer confidence, consumers should trade up when buying groceries. This could be in the form of buying higher-quality or value-added products or more fresh foods,” she adds. “The strong pipeline of supermarkets sites up for tender provides available avenues for supermarket operators to tap on the rising demand.”

The brokerage is reiterating its “overweight” call on the sector amid optimism on consumer outlook for the year.

“While we think Giant stores pale in comparison over its low-cost peer, Sheng Siong, our recent channel checks show that significant effort has been made to revamp the upmarket brand, Cold Storage,” Cai says.

Dairy Farm International Holdings operates both the Giant and Cold Storage supermarket chains in Singapore.

According to Cai, Cold Storage is emulating the company’s 7-Eleven franchise and China associate, Yonghui Superstores, to provide more ready-to-eat food and a dining experience within their premises. She notes that the range of products has also been widened and wine tasting is available at some of the stores.

While Sheng Siong remains RHB’s top pick, the brokerage says it is also positive on Dairy Farm on the back of strong demand from North Asia and its health & beauty division, which are expected to continue to drive growth for the group.

“Its supermarket division has begun to see some of the new strategies implemented by CEO Mr Ian McLeod in Singapore. We are positive on this front but think the full rollout of new strategies across South-East Asia could take time,” Cai says.

RHB is keeping its “buy” recommendation on Dairy Farm with a target price of US$9.66.

“With brick-and-mortar players upping their game to differentiate themselves, consumers are likely to benefit from a better grocery shopping experience. We believe this could help to attract foot traffic and bump up transaction volumes,” says Cai.

“In addition, with the chain operators pushing higher-value products such as fresh food (Sheng Siong) and ready-to-eat food and alcohol (Cold Storage), we believe there is also potential for an increase in basket size,” she adds.

As at 12.54pm, shares of Sheng Siong are trading flat at 99.5 cents while shares of Dairy Farm are trading 7 US cents higher at US$8.67.

These imply an estimated FY18 price-to earnings ratio of 19.9 times and a dividend yield of 3.7% for Sheng Siong, and an estimated FY18 price-to earnings ratio of 22.1 times and a dividend yield of 2.8% for Dairy Farm.

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