REGIONAL STOCKS hit new lows as the big R word looms although many say the recession is already here. Hong Kong had its worst week since 2008 when the Hang Seng Index closed last Friday at 17,668.8, down 1,249.1 points for the week. The Straits Times Index hit its lowest since May 2010 when it ended at 2,702.03 points on Friday, down 2% for the week.
During periods of market turmoil like this, defensive stocks that are nicely sheltered from global volatility will naturally be thrust into the spotlight. One such stock is supermarket operator Sheng Siong Group.
In a report issued today (Sept 23), OCBC Securities initiated coverage on this stock with a “hold” rating and target price of 43 cents. The company, which runs a chain of 23 supermarkets and three wet market stalls, is among the leading supermarket chain operators in Singapore. It was listed on Aug 16 with an IPO price of 33 cents. It went as high as 56 cents on Aug 31 before coming down to close at 43 cents on Friday.
“As supermarkets participate in the sale of consumer staples, they generally exhibit some resilience against economic downturns. Given the necessity of these items for daily living, demand remains relatively inelastic regardless of economic cycle,” writes OCBC Securities analyst Lim Siyi in the report.
For one, during the recent financial crisis, all three major supermarket operators here -- NTUC Fairprice, Dairy Farm and Sheng Siong -- managed to achieve “decent” revenue growth, even as overall consumer expenditure dropped, with consumers eating out less often and cooking more at home.
“Even with penny-pinching consumers during periods of economic slowdown, supermarkets would still be able to record sales as consumers would substitute more expensive items for cheaper alternatives,” adds Lim.
Perhaps of greater interest to investors is that Sheng Siong is apparently more efficiently run compared to its main competitors. According to an earlier study done by research firm Frost & Sullivan, Sheng Siong was able to achieve the highest revenue per floor area, based on 2009 revenue.
For each square metre of floor space, Sheng Siong brought in $17,085 in sales. By contrast, NTUC Fairprice, the largest supermarket chain, managed $11,924 per sqm and Dairy Farm, which runs the likes of Cold Storage, Giant, and Shop N Save, achieved only $8,456 per sqm. Sheng Siong’s new Mandai Link Distribution Centre, which was partly funded by proceeds from the listing, is expected to help improve its operational efficiency too.
What makes this stock attractive is not only the resilient nature of its revenue. The company has several strategies and ways it can achieve growth. For example, higher contribution can be expected from the fresh produce segment. Currently accounting for 30% of Sheng Siong’s revenue, fresh produce – the meat, fish, prawns and vegetables – are sold with a relatively higher gross profit margin of between 21% to 30%.
“Naturally, management hopes to achieve higher contribution from this segment going forward. Coupled with their expertise in handling fresh produce and the new distribution centre where it can handle larger quantities of fresh produce, we expect to see increased revenue contribution (of more than 50%) from this segment within the next few years,” writes Lin.
Next, Sheng Siong is expected to expand its physical presence. “An expansion of its store network is essential to drive future growth and we believe that the local market is able to support additional stores without over-saturation,” says Lin, who has identified several densely-populated areas consisting of 45% of total Singapore’s population where Sheng Siong has yet to establish a presence. These include Sengkang, Hougang and Toa Payoh.
However, to be sure, as the company has recently shut down two outlets (one at Tanjong Katong Road and Ten Mile Junction), revenue this year is expected to drop 10%. Margins, meanwhile, can be maintained at current levels, says Lin. Furthermore, two other new outlets (at Woodlands Industrial Park and Upper Thomson Road) will be opened, which will likely pick up the slack and raise revenue growth by 12% for FY2012.
On the whole, OCBC Securities sees Sheng Siong as a stock that has strong fundamentals and a healthy balance sheet. “Given the dismal economic outlook, Sheng Siong still represents a defensive play into domestic consumption demand.”
