Find out why analysts are unimpressed with Sheng Siong’s $80m share placement

The stock has tumbled since the disclosure.

Mainboard-listed supermarket operator Sheng Siong revealed on Wednesday that it is issuing 120 million new shares at $0.67 each, with proceeds to be used for expansion plans in Singapore.

This move did not impress analysts from CIMB, since it creates immediate dilution without any foreseeable earnings upside

“We expect the funds to be used for selective acquisition of new sites for growth, or sites on some of the
existing outlets with expiring leases. We view acquisition of existing sites as a defensive strategy to ensure that they can retain shop space in the face of competition. It will not boost earnings. We see that strategy as a necessity but we are not too hot on it. We are more excited about new store growth, if it happens, since that will add to earnings. uying retail stores is an asset-heavy strategy that isequivalent to putting capital into hard assets that generate RoEs of 4-6%, vs. a business ROE of 25% ROE i.e. not good,” stated a report from CIMB.

Here’s more from CIMB:

We see this as a replenishment of its cash pile. 1H14 ending net cash (S$95m) will dwindle down to ~$30m, after paying for Tampines (~S$65m).

This placement takes the post-Tampines cash pile back to S$110m, giving them the means to bid for sites, if needed. Sheng Siong still has to pay for J9 (~S$55m by 2017) in future.

We expect the funds tobe used for selective acquisition of new sites for growth, or sites on some of the existing outlets with expiring leases. Sheng Siong will not be committing more funds into the China JV at this juncture.

S$80m will probably buy it another 2 stores (~20k sq ft each), assuming capital values of ~S$2k/sq ft. Sheng Siong has 33 stores now. The question is whether it will be buy new or existing stores, management sounds like they do have new store targets