Ready-meal Sales Soar While Retail Sales Fall; Maintain SELL

• May’s retail sales continued to disappoint for the fourth consecutive month, down 2.1% y-o-y. This contrasted with F&B sales growth of 2.0% y-o-y. Bright spots included a slight rebound in supermarket sales, of 0.6% y-o-y. Still, we think it is too early to call for a recovery in demand for supermarket goods.
• Reiterate SELL on Sheng Siong Group (SGX:OV8), with an unchanged DCF-based Target Price of SGD0.95 (7.8% WACC, 1% LTG).
• Risks to our view include higher-than-expected new stores & same-stores-sales (SSS) contributions and any improved consumer sentiment.

Caution Continued to Reign

• May 2019 and 5M19 retail sales point to continuous purse-tightening as Singapore consumers held back spending on non-essential items. Unsurprisingly, the sub-indices that performed the worst were consumer discretionary: Furniture & Household Equipment (-7.5% y-o-y), Computer & Telecoms Equipment (-6.9% y-o-y).

5M19 F&B Sales Still Outperformed Supermarket Sales

• As anticipated in our 18 Mar initiation report (see report: Sheng Siong Group - Maybank Kim Eng 2019-03-18: Prefer Purchase At Promo Price), 5M19 F&B sales continued to outperform supermarket sales: +2.1% vs -0.8% y-o-y. We think this reflects Singaporeans’ increasing preference for time-saving and convenient ready meals over home-cooked ones. This is detrimental to supermarkets’ fresh-produce sales, in our view.

No Forecasts

• Sheng Siong Group will be releasing new-store contributions.
• While Sheng Siong Group opened three new stores in May, we remain concerned about same-store-sales weakness.

Poor Appetite Likely to Persist

Tightening strings

• May and 5M19 retail sales reflected 1% y-o-y. Excluding motor sales, sales were down 0.9%.
• Our house recently cut 2019E GDP growth forecasts to 1.1% from 1.3%, citing rising risks of a recession (see report: Recession clouds darken; cut 2019 GDP forecast to +1.1%) and weakening labour-market conditions. While the latest Singapore consumer confidence index published by The Conference Board - Global Consumer Confidence Index this month shows an unchanged level of confidence (2Q19: 92, 1Q19: 92), we do not expect a recovery in sentiment anytime soon. This is because we think job security, wage growth and the state of the economy will continue to weigh heavily on Singapore consumers’ minds.

Ready Meals Snatched the Dollar

5M19 F&B sales supermarket

• The Supermarket & Hypermarket sub-index rebounded by 0.6% y-o-y in 2.1%. The restaurant sub-index put in Food Caterers’ sales contracted 1.2% in May, they grew 1.5% in 5M19.
• We think the contrast between consumer retail and F&B sales points to Singaporeans’ increasing preference to spend on ready meals, even as they look to save for other items. We see this as an early indicator of structural changes in dining habits, which may be detrimental to supermarket sales.

Valuations already pencil

• Our valuation already captures tepid same-stores-sales contribution of 0.5% for FY19-20E. Sheng Siong Group’s same-stores-sales contracted 1% in 1Q19, which it blamed on high-base effects of 2018’s Chinese New Year sales, shrinking basket values and cannibalisation of some stores due to the location proximity of new stores. same-stores-sales would be key to watch in its coming 2QFY19 results.

Source: Maybank Kim Eng Research - 15 Jul 2019