SINGAPORE (Apr 11): RHB is upgrading its call on Sheng Siong Group to “buy” from “neutral” with a higher target price of $1.11 from 98 cents previously, which results from a 2-3% increase in FY18-20 estimates and target P/E from 19 to 21 times.

In a Wednesday report, analyst Juliana Cai says she thinks the market has underestimated the group’s near-term growth prospects given the recent improvement in consumer confidence and rising domestic consumption.

She also recommends investing in Sheng Siong for its defensive nature.

RHB’s increased confidence in the group’s impending performance comes after conducting channel checks and a company visit, which suggests Sheng Siong has been working to improve its product offerings and image.

“Due to its mass-market positioning, the old Sheng Siong supermarkets used to give us an old, dirty and messy feeling. However, our recent visit showed us the new stores are much neater and cleaner compared to some of the Giant stores,” says Cai.

<strong><i>Image: Inside Sheng Siong’s Fernvale outlet – fruits are no longer displayed right in front of shop entrance. Instead, most are packed (Source: RHB)</i></strong>

In the analyst’s view, the group would also stand to reap more operational efficiencies from higher-than-expected capacity coming from the extension of the group’s upcoming distribution centre.

Construction of the new distribution centre is slated to completely by early 2019, and is estimated to add about 20% more storage space after the existing car park is shifted to the basement.

While concerns remain over the near-term saturation of supermarkets in Singapore due to a large number of supermarket sites available for lease by HDB, Cai thinks the impact is only likely to be felt in two to three years’ time, when most of these sites have been bid for and opened.

“Some of Sheng Siong’s new outlets, like the ones we visited, are not located near any shopping amenities such as malls or suburban centres that are within walking distance. The outlets at Fernvale Street and Edgedale Plains, for instance, are in front of the river or forestry. As such, we believe the group has a captive consumer base, as the people living in these new HDB estates do not have other shopping alternatives in the vicinity,” she concludes.

As at 10.10am, shares in Sheng Siong are trading 1 cent higher at 98 cents or 5.1 times FY18 book.

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