Supermarkets trump department stores in coming slump

But which chain was singled out for its promising revenues and margins?

OCBC said Sheng Shiong Group, which just opened two stores in Upper Thomson Road and Woodlands Park, will have a relatively good performance in 2012 after a rocky 2011.

Its strong operations and coping effects inherent to supermarket category will help it shine amid a depressed retail environment. The same can’t be said for department stores and most restaurants, which will likely see fewer patrons.

“We favour supermarkets as well as providers of lower-end/cheaper products (instant beverage mixes/food products/etc) over direct sale retailers (departmental stores) and F&B service establishments. We favour the former due to their defensive nature in times of economic downturns as well as their ability to attract consumers even during downturns. Therefore, our preference in the sector is Sheng Shiong Group,” said OCBC in a report.

Sheng Shiong Group is also expected to announce two new stores by 1Q 2012, which will further increase its revenues, especially from the high-margin fresh produce segment.

Here's more from OCBC:

Two new stores commence operations; more store openings expected. SSG's new store located along Upper Thomson Road (11K sqft) and Woodlands Park (14K sqft) commenced operations after leases were signed back in Sep. Although the stores will not contribute materially to SSG'sFY11 results, their addition puts SSG on track to cover up the gaps left by the closure of the Ten Mile Junction and Tanjong Katong outlets. In terms of other outlets in the pipeline, SSG has inked a deal to open a store at Jalan Besar (16K sqft).

Moving forward, we anticipate at least another two more store openings to be announced by the first quarter of the next year. Fresh produce segment to benefit with retreat of CPI in 2012. The fresh produce segment for SSG is its most lucrative operating segment due to its larger gross margins. With this year 's inflation rate coming off from its 3Q11 peak, the Monetary Authority of Singapore (MAS) forecasts 2012 CPI to come in at between 2.5-3.5% following the slowing of economic growth as well as easing in demand conditions. As inflation affects the fresh produce segment the most, a retreating rate will mean that retreating rate will mean that operating margins for this lucrative segment will remain uninhibited.

Preserving FY12 earnings forecast; maintain HOLD. With a potential economic slowdown in 2012, SSG represents a quality defensive play - with its strong fundamentals and healthy balance sheet and relatively inelastic domestic consumption demand. We are leaving our FY12 earnings forecast unchanged (+12% YoY FY12F revenue; +10% YoY%1 FY12F net profit) and maintain our HOLD rating. However, we revise our fair value estimate to S$0.44 (previous S$0.43) following the one-time gain from the sale of its warehouse rosy.