SINGAPORE (May 31): CGS-CIMB Securities is upgrading Singapore’s consumer staples sector to “overweight”, from “neutral” previously, on the back of expectations of improving retail sales.
Continuing from a 1.8% growth last year, Singapore’s retail sales index (RSI) excluding motor vehicles rose 2.6% in Mar 2018.
“The RSI typically tracks the GDP growth rate, and given our in-house GDP growth forecast of 3.2% in 2018F, we believe Singapore’s retail sales are on a better footing in 2018F,” says lead analyst Cezzane See in a report on Wednesday.
And See believes supermarkets and hypermarkets will be the key beneficiaries from the improving consumer sentiment.
“Not only are they gaining market share from convenience stores, they are also likely to be the least disrupted by the growing threat of e-commerce,” See says.
“Although the threat of e-commerce is rising, we note that internet retail can never fully replace physical stores, but these stores would have to innovate in order to stay relevant; and the threat is likely lowest for the grocery retail players,” she adds.
As such, CGS-CIMB favours Sheng Siong Group as its top pick in Singapore’s consumer sector.
“We believe its ‘heartland’ consumer focus makes it the least vulnerable to the rising e-commerce threat,” See says.
The brokerage has an “add” recommendation on Sheng Siong with a target price of $1.18.
While Sheng Siong’s share price has risen 7% year-to-date to 18.6 times forward price-to-earnings (P/E), See notes that it is still trading below its Asean peers’ average of 22.6 times and its own historical 3-year average of 20.9 times.
“We believe this is unjustified given its current outlet growth upswing,” she says, adding that Sheng Siong has signalled its intention to open eight new stores in FY18. “It is also in a net cash position, which is dry powder for capex to innovate its stores, M&A opportunities or defending market share.”
Dairy Farm International (DFI), which operates the Giant and Cold Storage supermarket chains in Singapore, is CSG-CIMB’s second top pick in the sector.
The brokerage has an “add” call on DFI with a higher target price of US$9.55.
“We have upgraded our target price for the stock significantly as we expect much better earnings prospects for its health and beauty segment in North Asia and higher earnings contribution from Maxims and Yonghui (which gives DFI exposure to the growing grocery segment in China),” says See.
“Within the Singapore retail space, we believe its convenience stores may face some pressure from supermarket rivals, while its health and beauty segment (Guardian) sees some competition from discount retailers and e-commerce,” she adds.
However, See opines that these risks have been aptly factored into its target price, which have been pegged to –0.5 standard deviation below its historical 5-year average of 26.3 times P/E.
As at 11.35am, shares of Sheng Siong are trading 1 cent higher at $1.00 and shares of Dairy Farm are trading 12 US cents lower at US$8.83. These imply estimated FY19 P/E of 18.6 times and 22.0 times, respectively.
