Going undercover. The recent Olam-Muddy Waters scandal has prompted us to go "undercover" and conduct site visits to selective Sheng Siong outlets. As our earnings assumptions are based on sales per square foot of store space, we visited the three outlets that opened this year and checked out two previously non-performing stores to see if they are now up to scratch. We also sought to verify the claim that "Sheng Siong’s prices are the street’s lowest". Our findings were highly encouraging and we believe that Sheng Siong is on track to meet our earnings expectations this year and achieve decent growth next year.

The Sheng Siong experience. Sheng Siong’s ability to maximise store space is complemented by its close attention to specific customer demographics. For instance, we saw bags of instant coffee placed right next to the counter in the 24-hour outlet in Geylang, while more Western than Chinese products were displayed in the Upper Thomson store. Larger outlets have neat rows of shelves displaying the products advertised in newspapers or on TV, while the arrangement of the fresh food sections is modelled after the wet market.

Consistent electronic price tagging. In the outlets we visited, all dry goods and a number of fresh food items have electronic price tags and barcodes attached, whereas a couple of promotional items have iPadsized tags. We are in favour of such tagging as it enables quick price changes for items on demand and also ensures high inventory turnover.

Low prices, high efficiency. Offering the lowest prices in Singapore’s supermarket hemisphere, Sheng Siong impresses us with its willingness to invest in technology to improve efficiency. The workers, too, were constantly restocking the shelves to ensure that they were filled. We continue to like Sheng Siong for its high growth potential. We are pegging the counter to Dairy Farm International’s 12-month forward P/E of 27.0x with a 20% discount, and upgrading to SGD0.60. Maintain BUY.

Source: Maybank Kim Eng Research - 26 Nov 2012