Sheng Siong Group: Path to 120 stores and beyond
- On-site visit of inaugural CBD store in The Cathay indicates viable new store concept and identifies less popular CBD malls as potential strategic expansion white space
- Up to 55 HDB store opportunities available through a combination of tenders at new BTO estates and relinquished stores
- SGD520mn distribution centre (DC) investment planned to support store growth ambitions, with est. annual depreciation in range of SGD26-28mn
- Raise TP to SGD2.60 on higher fwd PE of 23.7x, justified by est. 10% long-term EBIT margin
Sheng Siong Group (SSG) has budgeted SGD520mn for a new 1.6mn sqft distribution centre (DC) slated for completion by end-2029. Designed to support at least 120 stores, the DC expands SSG’s logistics capacity and network reach. In this report, we address three key questions: (i) why the DC is necessary, (ii) what the investment implies for earnings, and (iii) how investors should assess SSG’s value in light of the DC.
Why is the new DC necessary?
Existing facility operating close to maximum capacity. The current DC, completed in 2011, was originally designed to support 50 stores. Over the years, the company has invested in equipment upgrades and warehouse expansion to improve its capacity. We estimate the optimal capacity at ~70 stores. With 85 stores projected by year-end, the company is likely operating at near maximum capacity. Going forward, headroom for margin expansion could be more limited as the company will face capacity constraints regarding opportunistic buying.
Ambition to grow to 120 stores and beyond. As highlighted in its press release, the company expects the new DC to support at least 120 stores. Considering the utilisation of its existing DC, we believe the new one could comfortably support a meaningfully higher number of stores.Provide additional lease runway and operational competitiveness. Beyond boosting capacity, the new DC extends the master lease to 2058, adding 19 years compared to the current facility, which expires in 2029. It also strengthens the company’s ability to compete with NTUC FairPrice, which has upgraded its supply chain in recent years. This includes, most notably, a state-of-the-art fresh food distribution centre of about 750,000sqft completed in 2021 for over SGD23mn, and the signing of an agreement to add 30 autonomous vehicles to its distribution fleet in Oct 25.
Where do we see store count growth?
We see three key sources of new stores: (i) CBD malls, (ii) BTO sites, and (iii) relinquished stores.
CBD malls
Format of new CBD store seems well-received, opening room for potential expansion in select CBD malls. On our visit to Sheng Siong’s first CBD outlet at Orchard (The Cathay), we observed: (i) an expanded ready-to-eat range tailored to office workers (see Fig 1); (ii) increased sponsored shelving that can drive incremental trade income (see Fig 2); and (iii) a high proportion of self-checkout lanes to optimise labour productivity (see Fig 3). Mid-weekday footfall appeared healthy for The Cathay, despite strong competition from the better situated Plaza Singapura nearby.
BTO sites
New estates provide lucrative new store opportunities. Based on our comprehensive review of HDB site plans for upcoming BTO flats, we identified 26 supermarket tenders over the next four years (see Chart 1). Beyond the sheer number, the mapped locations show limited nearby competition, suggesting attractive unit economics (see Fig 1). Drawing on the past five years, we estimate Sheng Siong’s tender win rate at about 67% (see Chart 2), which implies securing roughly 17 of the 26 sites, or about four stores a year, in line with the company’s target of three to five annually.
Relinquished stores
U Stars and Hao Mart suffering significant losses and could relinquish more stores in coming years as they exit the market. Based on their latest published financials, both businesses are generating negative cash flow (including lease liability payments) and are sustained by fresh shareholder injections. U Stars reported a SGD25mn loss and SGD16mn negative operating cash flow in FY23 (year ended 31 May). Hao Mart similarly reported a SGD32mn loss and SGD9mn negative operating cash flow in FY24 (year ended 31 Mar). Together, they operate 28 HDB stores and 2 private outlets, which could become takeover opportunities for Sheng Siong.
Overall, there could be up to 54 HDB store opportunities (26 stores in new BTOs and 28 from competitors) and 2 private outlet opportunities in the coming years.
How will the SGD520mn investment be allocated, and what are the implications for earnings?
Majority of depreciation attributable to building and equipment. While no specifics were shared, based on publicly available information, we estimate the potential range of the breakdown in Table 1. Accordingly, we estimate the company could incur annualised depreciation costs ranging from SGD26mn to SGD28mn post commencement of operations at the DC in late 2029.
Mandated sale of existing DC when new DC is operational could fetch SGD100mn to offset investment cost. As part of the agreement with JTC for the Sungei Kadut land, Sheng Siong is expected to sell the existing facility within two years from the date of the temporary occupation permit of the Sungei Kadut Property or by 17 Dec 31, whichever is earlier. Based on CommercialGuru, the rental rates for similar sized asset range between SGD14mn to SGD16mn per annum. With a nine-year lease remaining and an option to renew for another 30 years, should the company sell the asset in early 2030 at 6% discount rate, we estimate the company could earn around SGD100mn from the sale.
Expect long-term operating margin to land closer to 10%. As highlighted in our previous deep-dive report, we believe the current operating margin at the ~11% level could be unsustainable due to the need for capacity expansion to support growth. Based on our estimates, we believe the company could sustain an operating margin at the 9.5% to 9.9% level in 2030 when the DC is operational.
What’s a fair valuation for the company?
Maintain BUY with higher TP of SGD2.60. We believe the company deserves a valuation premium at 23.7x fwd PE based on an estimated normalised long-term EBIT margin of ~10%. Our conviction is anchored by a statistical analysis of developed market peer valuations, which indicated that the EBIT margin explains the majority of fwd PE valuation. Moreover, as a highly liquid and well-managed company, we believe SSG will be a key beneficiary of MAS EQDP funding.
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