Latest Retail Sales Down; Maintain SELL

• Singapore’s Feb 2019 retail sales were down 10.0% y-o-y while the supermarket & hypermarket sub-index was down 13.3%. After adjusting for the “Chinese New Year” effects, it is the first time the sub-index saw a y-o-y contraction and the second time since 2016 it had underperformed the main index during the Jan-Feb period.
• We believe the weakness reflects deteriorating consumer sentiment due to the uncertainty over US-China trade deal and slowing GDP growth.
• Reiterate SELL on Sheng Siong Group (SGX:OV8) with an intact DCF-based Target Price of SGD0.95 (7.8% WACC, 1% LTG).

Retail and Supermarket Indices Declined Y-o-y

• Retail sales in Singapore declined 10% y-o-y in Feb while the sub-index for supermarkets & hypermarkets slid 13.2%. This was partly due to “Chinese New Year” effects, as retail sales generally surge prior to the holiday. The 2-day holiday fell on 16 -17 Feb in 2018 while this year, it fell on 5-6 Feb.
• We adjusted for the seasonality by averaging the figures for Jan and Feb. After adjustments, the Retail Sales Index still dipped 0.9% while the sub-index was down 2%. We ran an analysis of “Chinese New Year” effects from 2010 onwards to see how the sub-index used to fare during the festive period. It appeared that 2019 is the first year supermarket sales see y-o-y contraction and the second time since 2016 that the sub-index underperformed the main index.
• The trend since the start of 2018 appears to validate our concern about shrinking basket sizes for supermarket operators such as Sheng Siong Group. As the CPI for food ex-food servicing services has remained in positive territory in the same period, we believe the drop in supermarket sales was mainly volume-led. This implies falling demand for supermarket products and does not bode well for Sheng Siong Group’s revenue.

Budget Goodies at Best a Mild Booster

• We expect Singapore consumer sentiment to remain bearish at least in the first half of 2019, given signs of labour-market weakness in 4Q18. According to Ministry of Manpower data, resident unemployment and long-term unemployment rates for most age and educational groups ticked up in that quarter.
• With some of the 2019 budget “goodies” such as GST vouchers to be dished out in 2H2019, we ran a trend analysis to ascertain if there were past increases in 2H consumer expenditure after Singaporeans received their entitlements. The GST Voucher is a permanent scheme introduced in Budget 2012 to help lower-and-middle-income households with their expenditure, with the cash and Medisave component credited to eligible Singaporeans in August. Not only that, Singaporeans who qualify for the Pioneer Generation Package introduced in 2014 usually receive letters in August informing them of their eligibility. Medisave top-ups are also credited to their accounts around that time.
• While there were small increases in supermarket sales in past August months, this did not happen in 2018. Supermarket sales continued to decline in Aug-Sep 2018 on a y-o-y basis, by 1.0% in each month, although their declines moderated from -3.4% in Jul 2018. The last time the decline happened was in 2016, when consumer sentiment took a dip.
• Given that 1Q and 3Q typically see higher sales volumes for supermarkets, we noted that this seasonality coincides with the dishing out of Budget handouts. Hence, it is difficult to ascertain if the increase in supermarket sales was due to the timing of the Budget handouts, seasonality effects or an improvement in consumer sentiment.

Risks to Our View

• We expect Sheng Siong Group’s 1QFY19 results, due this month, to be in line with our expectations.
• As 1Q traditionally contributes about 26% to full-year revenue, we expect revenue to come in at about SGD251m, a 10.0% y-o-y growth due to the strong contributions from the record-high of 10 new stores opened in FY18, and PATMI of SGD18.3m, a flat growth of 0.1% y-o-y growth due to higher costs arising from opening of new stores.
• We have already pencilled in shrinking basket sizes. Risks to our view include higher-than-expected new stores & SSS contributions and any improved consumer sentiment.

Source: Maybank Kim Eng Research - 15 Apr 2019