Why you shouldn't panic that Sheng Siong Group has no new stores

Margin stability seen as competition cools.

According to OCBC Investment Research, Sheng Siong Group's lack of announcement of any additional stores means it will likely post lower revenue growth than previously expected. But the research firm noted that it foresees margin stability to continue as all 3 big supermarket chains have relatively reduced their competition in what is seen as a "tacit agreement to preserve margins."

Here's the complete analysis from OCBC:

No new stores yet. As we approach the end of Sep, Sheng Siong Group (SSG) has yet to announce the addition of any new stores due to keener competition for retail space and the lack of availability in desirable locations. While this development means that the number of SSG stores stays at 33, we expect its share price to remain supported at current levels ahead of its 3Q13 results release.

But 3Q13 should still show revenue bump from new stores. Typically, new stores take about six months to gain traction and approach a steady state of operations. Therefore, with four stores opened back in 3Q12 and another two in 4Q12, SSG should still experience revenue bumps in 3Q13 from the full-quarter contributions of these stores.

Macro-environment remains conducive. Inflation and economic uncertainty remains the top two concerns for consumers, who have indicated in a series of surveys conducted that they intend to cut back on discretionary spending. This is a positive for supermarket spending, which continues to see a greater pace of year-on-year increases in spending vis-à-vis F&B spending. In addition, competition amongst the big 3 supermarket chains has been relatively subdued, reinforcing our view of a tacit agreement to preserve margins.

Maintain BUY. The lack of new stores sees us lowering our FY13 and FY14 revenue growth to 8% each from 9.5% and 10% previously. However, we expect margin stability to continue, and we favour the counter for its defensive qualities and healthy balance sheet. In addition, a potential catalyst could emerge in the form of its pilot e-commerce initiative, likely to commence in 4Q13. Reiterate BUY for SSG with a slightly lower fair value estimate of S$0.78 (S$0.80 previously).