Sheng Siong's new-store strategy may fall flat as consumer sentiment sours: analyst

It opened 10 new stores in 2018, the highest figure since 2012.

Even though Sheng Siong Group’s earnings tend to fare better than other consumer-discretionary stocks, the risk of souring consumer sentiment poses a downside risk to its comfortable position, according to Maybank Kim Eng, especially when consumers are tightening their purses against a backdrop of slower GDP and slow-to-stagnant wage growth.

According to a report, Sheng Siong opened a record-high of 10 new stores (those opened in the last and current financial years) in FY2018. The last time it opened close to that many stores was in FY2012, with eight new stores, noted Maybank KE analyst Sze Jia Min.

“However, unlike in FY2012, these 10 new stores, particularly those opened in the second half of FY2018, were opened against a backdrop of deteriorating GDP growth as well as changing consumer dining habits. Hence, we are more conservative than the Street and management in our estimates of new-store sales contributions,” Sze said.

Sheng Siong’s management also said that its new stores that opened in FY2018 are not growing as fast as their historical run rates, the analyst noted. As new stores usually contribute strong revenue growth in their first 3-4 years, Maybank KE expects Sheng Siong’s 10 new stores to contribute 7.2% or the bulk of FY2019E total revenue growth of 8.4%. 

“We understand from management that while only five new commercial units will be available for online bidding in 1H2019, six HDB shops that were won by competitors via online bidding in 2017-2018 are now vacant,” Sze said. Of these six, three were recently awarded to another supermarket operator. Sheng Siong is looking at bidding for the other three.

“We assume in our forecasts that it will open four new stores in FY2019E,” Sze added. “In addition, we expect the new stores’ contribution from stores open in FY2019E to be weaker by historical standards, taking into account more cautious consumer spending, mitigated by downtrading.”

Moreover, a study by the brokerage firm showed that there is a possible long-term trend of consumers choosing cooked-food deliveries available at the push of a button, which may affect the frequency of their supermarket visits. Singapore consumers under age 40 are also the
most receptive to cooked-food deliveries, it found.

“This may pose a challenge to Sheng Siong, as it expands to locations with a greater concentration of younger families. Management confirmed during its latest results briefing that sales at its new stores located in residential areas mainly occupied by younger people are growing more slowly than the historical average for its new stores,” Sze commented.