Sheng Siong Group stays ‘recession-proof’

Local supermarket chain operator, Sheng Siong has seen its stock rallied 47% above IPO price of $0.33 since its trading debut last month. We like the group for its recession-proof business model with strong cash flow generation. At current valuation of 19.7x core PER, we think the stock appears fairly priced. Nevertheless, share price should be quite well supported by decent yield of almost 5%.

Recent development: Priced at 33 cents apiece, the IPO was approximately 1.3x over-subscribed. Despite general weak market conditions, the stock has had a strong run up, touching a high of $0.575 on active trading after its debut on SGX last month.

Attracted strong anchor investors. The IPO raised net proceeds of about S$62.6m, of which 47.9% will be used to repay its term loan, 31.9% for the expansion of the Group’s grocery retail business and the reminder for working capital purposes. The offer has attracted prominent anchor investors such as JF Asset Management, Prudential Asset Management, FIL Investment Management, VPL Funds and Kenrich Partners.

Top three local grocery retailers. The group is Singapore’s third largest grocery retailer after NTUC Fairprice and Dairy Farm. To further expand its network, Sheng Siong recently announced that it had entered a lease agreement to secure premises for a new store in Woodlands Park. We understand the lease agreement is for a period of three years from 1 October 2011, with two consecutive options to renew for additional periods of three years each.

Recession-proof business. Perhaps the biggest investment merit for Sheng Siong is that it is operating in a relatively stable business with strong cash flow generation amidst a potential economic slowdown. While the group has no formal policy, it intends to distribute up to 90% of its net profit to shareholders for the FY11/12. Appears fairly priced for now. Sheng Siong is trading at 19.7x core FY10 (fully diluted) PER but still a discount to its closest peer, Dairy Farm of about 24x. At current level, we estimate the stock offers a prospective dividend yield of almost 5%.