SINGAPORE (July 31): DBS Group Research is maintaining its “buy” call on Sheng Siong Group (SSG) with a higher target price of $1.26, implying 25 times FY19F earnings.

The valuation is pegged at +1 standard deviation (SD) point of SSG’s historical mean valuation since listing, and below regional peers’ average of 26 times earnings.

See: Sheng Siong posts 6.3% rise in 2Q earnings to $17.2 mil on higher sales

In a Tuesday report, analyst Alfie Yeo notes that SGG’s growth thus far has been driven by more stores, improving efficiencies, and margins which have continued to strengthen with more supplier rebates and lower costs.

He sees this improving further once the group’s warehouse expansion is operational in FY19F.

Additionally, Yeo believes the stock is poised to ride on the robust near-term outlook for new HDB supermarkets, with at least seven outlets up for tender in the next six months.

“Same store sales growth (SSSG) and sales per square feet matrices also remain strong. Dividend yield is decent at 3-3.5% with potential scope for a higher payout,” says the analyst.

For now, Yeo does not think Amazon’s entry as a serious threat to SSG given their different target customer base, Amazon’s relatively small warehouse, and his belief that the online market will take time to gain share from brick-and-mortar stores.

“We believe that Sheng Siong, with its decent store network and logistics chain, could possibly be a takeover target for online players eventually. Online players such as Alibaba’s Hema supermarket and Amazon (Wholefoods) are taking the online-to-offline route, and are operating physical stores. We see scope for higher dividend payout if there is excess cash on its books,” he concludes.

As at 3.16pm, shares in SSG are trading 1 cent lower at $1.06, or 5.8 times FY19F book.