SINGAPORE (Mar 19): Maybank Kim Eng is starting coverage on Sheng Siong Group (SSG) at “sell” with a  target price of 95 cents, which implies 19.5 times FY19F P/E – 1 S.D. below the stocks’ five-year mean.

The research house’s estimates for FY19-20E new-store sales and same-store sales (SSS) contributions are currently below that of the street. It is also forecasting for only four and two new store openings for FY19 and FY20E, respectively, compared to the 10 new stores SSG opened in 2018.

Maybank’s conservative projections are considering the supermarket chain’s believed exposure to a slowdown in consumer spending amid economic deceleration, which is expected to come on top of rising e-commerce competition and changing consumer habits.

In an initiation report on Monday, analyst Sze Jia Min highlights a number of downside catalysts that sees SSG likely to face in the near-term – for one, the rising trend of home-delivered cooked meals due to the emergence of food-delivery services in Singapore.

“These are early indicators of a structural change in consumers’ dining habits, where in the interest of time, ready meals are preferred to home-=cooked meals. Such a trend is detrimental to supermarkets’ fresh-produce sales,” says Sze.

Although she expects SSG’s revenue to grow 8.4% y-o-y on the back of new stores opened in 2018, Sze foresees tepid SSS contributions and smaller basket values dragging on subsequent revenue growth.

This comes as consumers are expected to further tighten their purse strings in the face of decelerating GDP growth, which the research house is forecasting to slow markedly to 1.8% in 2019 from 3.2% last year.

While Sze acknowledges SSG’s unique positioning for pricing its products competitively against market peers, she is more concerned about the increasing concentration of SSG, NTUC FairPrice, and DFI outlets in multiple HDB heartland locations.

This implies fierce competition, which in turn may limit consumer conversion to SSG after its competitors narrow the price differences between them.

 “Our analysis of a sample basket of staples shows SSG’s pricing to be comparable to market leader’s NTUC FairPrice and cheaper than competitors like Dairy Farm’s brands. Given small price differences between NTUC FairPrice and SSG and the proximity of their stores, we see limited consumer conversion to SSG when they trade down in an economic downturn,” says Sze.

“Given SSG’s heartland positioning, the supply of new HDB commercial sites for tendering, bidding competition and the number of supermarket choices vis-à-vis population density will be crucial to its revenue visibility, in our view,” she adds.

As at 11:35am, shares in SSG are down by 2 cents at $1.06 or 5.15 times FY19F book.