Why it's going to get tougher for Sheng Siong to thrive this year

Supermarket growth is expected to slow sharply as online grocery gain traction.

The going is to get tougher for Singapore supermarket giant Sheng Siong this year as the market is foreseen to slow down sharply.

Citing a study from Euromonitor, Maybank KimEng said the compound annual growth rate of supermarket revenue is expected to ease at 1.6% in 2016-2021, compared to 4.5% in 2011-2016. Maybank said this comes as online grocery gains traction.

"Watch out for the potential entries of Amazon and Tesco. Even management agreed that the online shopping model is better than brick & mortar," it noted.

Even with Sheng Siong's strong stance as a supermarket player, Maybank noted that it will be difficult to thrive.

"An ROE decomposition shows that Sheng Siong’s growth so far has been achieved on large margin improvement, which is nearing the limit and we expect further margin uplift to slow. Asset-use efficiency has suffered since 2014 since it started buying assets, and now even new store sales growth could be affected by increasing site competition. Finally, the last ROE lever, financial leverage, could be used to acquire growth but that could mean raising the risk profile beyond what investors would be willing to accept," it explained.