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This report is published for educational purposes only by students competing in the CFA Institute Research Challenge
Retailing Singapore
19 October 2011
CMP: 12 month TP: Market Cap: Bloomberg Ticker: Reuters Code: Free Float (%) Daily Avg. Volume Price Range (since IPO)
Figure. 1
Shareholding structure
Figure. 2
Y/E Dec 31 Revenue EBIT PAT EPS (Cents) Growth (%) PER (x)
FY09A 625.3 39.9 33.9 2.45 N/A 16.96 N/A 37.2% N/A
FY10A 628.4 49.0 43.0 3.11 27.0% 13.36 N/A 48.0% N/A
FY11E 644.0 35.4 26.4 1.91 -38.6% 21.75 11.71 25.1% 4.14%
FY12F 692.4 47.9 36.2 2.62 37.2% 15.86 8.39 24.4% 5.68%
FY13F 812.3 57.7 43.5 3.14 20.1% 13.20 7.09 28.5% 6.82%
FY14F 877.5 59.5 44.9 3.25 3.3% 12.78 6.81 28.6% 7.04%
FY15F 944.0 61.7 46.6 3.37 3.8% 12.32 6.53 28.9% 7.31%
Figure. 3
Company Filings, Compounders estimates
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Table of contents
Page
Economic overview Industry overview Company analysis Financial overview SWOT analysis Appendix
3 4 6 10 11 12
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Figure. 4
CAGR 8.9%
2010
Relatively stable labor market with low unemployment level and improving tourism scene fuels long term optimism in the consumption level of consumer goods. Nonetheless, increasing conservatism in spending triggered by below par economic climate might hurt above average growth levels.
Inflation Dynamics
Singapores CPI inflation has elevated in recent times reaching all-time high of 5.67% in August 2011. However, MAS core inflation has hovered around one third of CPI Inflation, which primarily has been stipulated by surging accommodation and private transport costs.
Figure. 5
CAGR 2.7%
Disposable Income per Capita (S$) '000 34 32 30 28 26 2005 2010 28.18 32.24
Figure. 6
CAGR 3.5%
Monitory Authority of Singapore, Compounders estimates
Figure. 7
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Third largest & Fast catching up with the top 2 players with a 13.1% revenue CAGR since 2006
Figure. 9
Figure. 10
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Singapores supermarkets and hypermarkets are expected to experience approximately 4-5% growth in revenues between 2011 and 2012, and between 1.5% and 2.5% growth during 2014 and 2015.
Figure. 11
Figure. 12
Seasonality
Revenue during festive periods such as Chinese New Year, Hari Raya Puasa and Deepavali tends to be higher as compared to the revenue in non-festive periods. All retailers hold promotions in conjunctions with such festive seasons.
Business Cycle
Since this industry caters to the domestic market in Singapore, it is not dependent on any export markets such as US or EU. Thus its relatively decoupled from the global economic turmoil at the moment. To add to that, FCMG retailing does not change much with changes in stock markets or economic sentiments as people consume basic essentials like food items and basic utilities in any case irrespective of price movements.
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Current Locations
SSG currently operates 1 hypermarket, 22 supermarkets and 3 wet market stalls across the island.
Figure. 14
Expansion Plans
The company raised net proceeds of S$79.5 million from its recent IPO of which about 30% will be allocated to the expansion of the store network. On an average, it costs the company S$1.5 million for every 10,000 sq ft of store expansion. This translates to a potential addition of 125,200 sq ft (+37%) from current operational area. The management targets to increase the number of stores to ~40 by 2015, which it feels the market can absorb, especially given the fact that there are several highly populated areas that still do not have an SSG outlet.
Company Filings, Compounders estimates
Figure. 13
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Area Bishan Bukit Merah Bukit Panjang Bukit Timah Downtown Core Geylang Hougang Jurong East Kallang Marine Parade Newton Novena River Valley Sembawang Sengkang Tampines Tanglin Tao Payoh
Region C C W C C C NE W C C C C C N NE E C C
# of Residents 91,298 1,57,122 1,28,734 70,314 3,722 1,20,690 2,16,697 88,188 99,559 47,318 6,242 46,640 8,206 72,732 1,67,054 2,61,743 17,293 1,24,653 Potential Areas
NTUC 3 5 2 3 3 6 5 3 4 3 0 5 1 3 4 9 0 4
SSG
Untapped markets
Supplier
Procurement
Warehouse / Distribution
Retail
Supplier
Shorter Supply Chain to Reduce Costs and Improve Margins
Mandai Facility
Retail
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Differentiating Factors
Productive space use and lean supply chain
1. SSG packs more items per isle as compared to its peers 2. SSG maximizes the amount of floor space to display product items by eliminating the traditional on-site storage areas in its outlets 3. To eliminate potential stock depletion, problems, the goods are replenished more than four times a day. 4. Existence and use of a real-time inventory management system provides for effective communications between the central warehouse and respective stores thus optimising the value of delivery trips.
Benefits realised
1. Maximisation of Revenue per foot-highest in the industry as shown below 2. Efficiently able to meet satisfy consumer demand for rapidly turned over products 3. Ensuring freshness and quality for its fresh food products Revenues in FY2009 per sq.m. (S$ per sq.m.)
17,085
Dairy Farm
Sheng Siong
Figure. 15
100%
Bulk breaking
2010
Figure. 16
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The Sheng Siong Show, a live television variety show, was launched in April 2007 and attracted strong viewership and has become a regular TV Show with leading TRPs. thus strengthening the brand.
House brands
House brands generally give 5-10% higher GP margin than the third-party brands. Currently, about 5% of the group revenue is derived from house brands. The company also sees potential to step up its house brand product offerings from the current 300 products to .2,000 products. The contribution from house brands is expected to double to 10% over 2011-15.
Price competitiveness
Minimum Cannibalization
Store selection is carefully done to avoid cannibalization. The shortest distance between Sheng Siong stores is 1.2-1.3Km compared to NTUCs 300-500m.
Currently, the company uses its dedicated fleet of 34 delivery trucks to dispatch inventory to its outlets, instead of employing third party logistics providers like its competitors. All the trucks have refrigeration facilities to support the delivery of perishable products. The company incurs S$75-80/trip vs. S$120-150/trip if outsourced agents are used.
No single supplier/contract supplier contributes more than 5% of SSGs total purchases so SSG is not at mercy of suppliers.
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Financial Overview
Margins Strength with Stability
The company is expected to have stable margins despite rising costs as it increases its focus on high margin house brands, reducing costs through operational efficiencies and spreading fixed costs over a larger revenue base through the expansion of their retailing network in high density areas of Singapore where revenue per sq ft would be optimized.
ROE 2011E
Valuation
Net Profit Margin % FY 2010 Based on an FCFE analysis and assuming a discount rate of 7.2%, our fair market value for SSG is S$ 0.67 per share. The cost of equity takes into account risk premium related to the Singapore market as well as an additional risk related to dilution through share options. Based on FY11 financials, the company may seem fairly valued, however, these were due to listing expenses (which are one time) and two stores closing down (which are expected to be replaced in 2012). However, if we take a look at the 1 year forward valuation multiple (FY12) analysis of SSG vs. its peers we see that SSG is relatively cheaper based on EV/EBITDA (x) and PE(x) valuation multiples as this excludes the one time listing expense, and takes into account the additional revenue from new outlets for which leases were secured in FY11. Furthermore, we can see that SSG offers a high dividend yield and is expected to offer such yields given the management commitment to high dividend payout ratios and a business model based on high generation of cash flows.
M Cap Name Country US $ bn Beijing China 0.3 Jinkelong Dairy farm HK 11.2 Lawson Inc Japan 5.8 Lianhua Super China 1.8 SSG S ingapore 0.5 Sun Art retail China 10.4 Wumart China 2.7 P/E 2011E 2012E 14.5x 24.9x 18.9x 15.2x 21.8x 41.1x 36.3x 12.6x 22.2x 13.4x 13.2x 15.9x 30.2x 29.7x EV/EBITDA Div Yield 2011E 2012E 2011E (%) 6.1x 15.1x 4.4x 4.4x 11.8x 14.9x 13.1x 5.4x 13.3x 4.2x 3.9x 8.4x 11.7x 11.0x 3.90 2.60 4.00 2.60 4.14 1.00 1.80
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SWOT Analysis
trengths
W
Lacking focus operations
eaknesses on Sustainable
Strong focus on fresh food and dedicated Infrastructure for it. Out of 540,000 sq. ft., 100,000 sq. ft area serves need of fresh food at new Mandai Link warehouse Experienced Management Management of SSG still rests in the hands of the three founding Lim brothers. They have 73 years of combined experience in grocery retailing. With their in-depth knowledge of the industry in Singapore, they have been able to drive SSGs remarkable growth over the years.
SSG can add value by improving employee retention/motivation through sustainability activities by raising prices or achieving higher market share with new or existing sustainable products. Whole Foods Market, for instance, raised its sales by 13 percent a year from 2005 to 2009. Susceptible to rent hikes/denials of lease renewals: Closure of two stores (Ten Mile Junction in Nov 2010 and Tanjong Katong in Sep 2011) significantly affected revenues of company.
pportunities
hreats
46% of residents across 18 locations in Singapore do not have an SSG outlet in the vicinity. While some NTUC outlets are located in the central areas, this frees up the hinterlands for SSG to enter. Thus SSG has a lot of scope for its store network, and we see no issue with it supporting and managing up to 40 stores
Highly competitive operating environment Although SSG has built up a strong following over the years, its ability to generate future revenue growth is certain. Its existing stores may face competition from new competitor outlets; it may lose customers to aggressive promotional marketing by its competitors. External factors
Increased profit margins by increasing number of house-brands Increase fresh product market share: In terms of its revenue mix, fresh produce is a key revenue generator, contributing roughly 30% to its revenue. Furthermore, the segment is highly profitable with gross profit margins ranging between 21% to as high as 30%
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Balance Sheet
APPENDIX
Income Statement
Year ending 31 Dec CY08AY09A FY10A FY11E FY12F F All Figures in S$ Millions Revenue Cost of Goods Sold Gross Profit Gross Profit Margin Other Income Distribution Expense Admin Expense Other Expenses Operating Income Operating Margin Interest Income Listing Expenses Invitation Expenses Financial Expenses Profit Before Tax Sharing Scheme Profit After Sharing Before Tax Income Tax Expense Profit After Tax Net Margin EPS (Cents) 625.3 (497.0) 128.4 20.5% 12.9 (4.3) (96.3) (1.0) 39.9 6.4% 0.2 (0.0) 40.1 (6.3) 33.9 5.4% 2.45 628.4 (491.7) 136.8 21.8% 16.0 (4.4) (98.3) (1.3) 49.0 7.8% 0.03 49.1 (6.1) 43.0 6.8% 3.11 644.0 (503.1) 140.9 21.9% 8.2 (3.8) (108.5) (1.3) 35.4 5.5% 0.5 (3.9) (0.21) 31.8 31.8 (5.4) 26.4 4.1% 1.91 692.4 (538.3) 154.0 22.2% 8.7 (7.6) (105.8) (1.4) 47.9 6.9% 0.5 48.5 (4.8) 43.6 (7.4) 36.2 5.2% 2.62
CY08A FY09A FY10A FY11E FY12F All Figures in S$ Millions 24.4 24.4 24.9 42.5 72.5 39.1 179.0 203.3 16.0 13.4 84.4 113.9 0.7 0.7 80.5 8.2 88.7 203.3 58.3 58.3 26.4 4.7 85.9 117.0 175.3 30.0 33.9 63.9 19.1 0.6 19.7 81.5 3.2 7.1 91.8 175.3 87.1 87.1 23.4 5.3 105.9 134.6 221.7 36.4 73.8 36.5 146.7 0.6 0.6 68.9 5.4 74.3 221.7 90.4 90.4 25.1 5.7 103.5 134.3 224.7 36.4 73.8 40.1 150.3 0.6 0.6 66.4 7.4 73.8 224.7
Inventories Trade and other Receivables Other Investments Cash and Cash Equivalents Current Assets Total Assets Share Capital Share Premium Fair Value Reserve Retained Earnings S hareholders Equity Financial Liabilities Deferred Tax Liabilities Non Current Liabilities Trade and other Payables Financial Liabilities Current Tax Payable Current Liabilities Total Equity and Liabialities
Key Assumptions Company S pecific Number of Outlets Number of Vehicles Revenue per Outlet Average Store Size (Sq Ft) Housebrands as % of Revenue Normal Goods GP M argin Valuation S pecific Risk Free Rate (S$ 20 yr bond) Market Risk (Rm) Beta Cost of Equity
Y/E Dec 31 Gross Margin EBIT Margin Net Margin ROE Inventory Days Receivable Days Payable Days Cash Conversion (days)
FY09A FY10A FY11E FY12F FY13F 20.5% 21.8% 21.9% 22.2% 21.9% 6.4% 7.8% 5.5% 6.9% 7.1% 5.4% 6.8% 4.1% 5.2% 5.4% 37.2% 48.0% 25.1% 24.4% 28.5% 18.29 19.60 17.00 17.00 17.00 24.78 2.74 3.0 3.0 3.0 49.2 50.0 50.0 45.0 45.0 (6.1) (27.7) (30.0) (25.0) (25.0)
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Risk factors
High Risk No Risk
Rising Costs
Labour costs and lease rentals are expected to rise and these constitute a material portion of the companys operating costs. An increase in these would hence, lead to an increase in the overall operating costs and reduce profitability. Mitigant: The company largely holds its cash in USD and other currencies, therefore with expenses in S$, an appreciation of the USD would help to improve margins.
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Threat of Substitutes Fresh food is now core strength of SSG SSG is able to provide food items at discounted prices because of increasing scale of economies. SSG is able to create product differentiation, hence lowering the threat of substitutes.
Threat of New Competitors The threat of entry of new competitors into the retail industry is low. Major brands have already captured the retail market in Singapore. Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value. Resources such as supplier base, warehouses & land are required to establish new supermarkets and this is therefore a considerable barrier to new entrants.
Intensity of Competitive Rivalry The intensity of competitive rivalry in the retail industry is extremely high because of a lesser degree of product differentiation, high exit barriers, and high fixed costs. But SSG is increasing its home-brands and focusing on wet market that : will provide significant product differentiation. This leads to stable operations despite of high competitive rivalry. It should be noted that from 2005-10 market share of SSG increased from 12.2% to 17%. Others share remained unchanged, clearly showing the strength of SSG in competitive environment.
Buyers bargaining Power Bargaining power of buyers is fairly high in the Retail Industry. Using Fresh food as its strength & increasing scale of economies, SSG is able to create product differentiation. This will not let customers switch easily, hence lowering buyers power.
Sellers bargaining Power The bargaining power of suppliers is fairly low in retail industry. It should be noted that the single supplier contribution is around 5-10% of total purchase by Supermarkets. Hence, the position of the Supermarkets such as SSG is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers.
Sensitivity Analysis
Market Risk
Housebrand COGS % of Sellling Price
Market Risk
Store Cost
Market Risk
Rental Increase
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Ownership and material conflicts of interest: The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does [not] act as a market maker in the subject companys securities. Ratings guide: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the securitys weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.
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