Sheng Siong could be a takeover target amongst online players: analyst

Its store network and logistics chain could attract those who are taking the online-to-offline route.

Sheng Siong could eventually be a takeover target for online players due to its store network and logistics chain, DBS Equity Research said.

“Online players such as Alibaba’s and Amazon are taking the online-to-offline route, and are operating physical stores,” the bank explained. “We see scope for higher dividend payout if there is excess cash on its books.”

In addition, the firm will not be exposed to ‘serious threats’ from the online players, DBS said. The bank added that Amazon’s entry is unlikely to take its toll on Sheng Shiong as its target customers are less of millennials who pose as potential market for online grocery shopping.

Moreover, DBS thinks that Amazon’s warehouse is relatively small compared to Sheng Siong’s retail presence in Singapore.

“Amazon is a more direct threat to Redmart and the online market is small currently and will take time to gain share from brick-and-mortar stores rather than ramp up rapidly,” the bank commented.

Meanwhile, OCBC Investment Research and KGI believe that Sheng Siong’s defensive business models could work to the firm’s advantage.

“Given its defensive business model and almost no foreign exposure, Sheng Siong’s business is relatively sheltered from global economic uncertainty,” KGI said.

Sheng Siong’s profits for H1 jumped 6.3% YoY to $17.15m from $16.13m. Revenue also rose 5.7% to $212.98m from $201.52m last year.

According to RHB, the firm’s growth will most likely be driven by new stores and gross margin expansion for 2018.

“As sales from the new stores normalise, operating cost will likely revert to the historical mean of 16.5% of sales, and in turn raise overall operating margin,” RHB commented.

However, DBS warned that excessive discounts and promotions in the market by competitors could result in lower margins for Sheng Siong.