• No major issues from The Verge
• Competition remains keen
• Defensive business

Small contribution from store in The Verge

Back in Feb, Sheng Siong Group (SSG) had highlighted that they had a store in The Verge (45k sq ft) in response to media reports on the mall owners having intention to sell the properties. A JV between Lum Chang Holdings and a fund of LaSalle Investment Management Asia had signed an agreement to buy The Verge. The timeline for redevelopment of the mall is unclear, while the lease for SSG’s store is currently slated to expire by 31 Mar 2017.

With this looming, we keep in mind that this store’s same store sales growth has been relatively weak in the past few years mainly due to the construction works in the vicinity. Its revenue contribution has not been significant and we continue to see overall revenue growth next year for the group being driven by new stores.

Eyes on local competition and e-commerce

The competitive scene for the local grocery sector looks set to intensify. Dairy Farm International may make a comeback next year, while new concept players such as Global Halal Hub are expected to expand their presence locally. On e-commerce, we reiterate that it is not easy to reach the desired scale required for most players here, thus we like that the group is prudent in their e-commerce plans.

Maintain BUY

In addition to nine new stores as the key growth driver, the group can also renovate older stores that typically would boost sales growth, and we expect operating margins to be sustainable. In view of the above, we reviewed our estimates and raised our EPS estimates slightly, as well as updated assumptions for our DCF model, thus our fair value estimate increases from S$1.07 to S$1.15.

While the share price has had a good run up, based on potential return including dividends, we keep our BUY rating on the stock. We still like the stock for its defensive business, net cash position (S$51m as of 30 Jun-16), and decent yields of ~3.5% vs. the consumer sector.

Source: OCBC Research - 5 Oct 2016