Excerpts from analyst's report

RHB Research analyst: James Koh

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Sheng Siong remains a Top Pick for the consumer sector and we expect its business to remain resilient despite the macroeconomic headwinds. Maintain BUY with DCF-based SGD1.05 TP (from SGD1.10, 27% upside), after minor tweaks to earnings estimates.

We believe the stock is to remain a safe haven, given the strong majority shareholding, defensive business and healthy dividends. 

 Recession-proof business. We believe Sheng Siong has a resilient business, which would thrive during recessions. In our recent trip to various supermarkets in Singapore, we noticed that there may be some trading down by higher-segment consumers, ie expatriates to NTUC FairPrice from Cold Storage and working professionals to Sheng Siong from NTUC FairPrice. This is common during poor economic conditions.

 Consumers trading down. On an overall price basket basis, we believe that Sheng Siong is the most competitive in Singapore, about 2-3% lower than NTUC FairPrice. It is also well-perceived for providing value to consumers. The company is able to maintain healthy margins by: i) being operationally cost efficient, ii) undertaking bulk purchase using its central warehouse, and iii) directly sourcing for its fresh food offerings.

jameskoh may4.14 Upside for new stores this year. We believe the rental environment is currently conducive to Sheng Siong, given the weak consumer demand. Management is optimistic about securing new stores in 2016, given the bumper crop of 61,000 new Housing and Development Board (HDB) flats to be completed over 2H15-2017. Given the long-term nature of HDB estate leases, this could potentially help the company secure a next leg of growth -- James Koh (photo).

 Expecting strong 4Q15 results, maintain BUY. After fine-tuning our FY15F earnings estimates by 1%, our TP is tweaked to SGD1.05 (vs SGD1.10), implying 25x P/E.

We expect Sheng Siong to announce strong 4Q15 results at end-February, with YoY net profit growth of 21% to SGD14.2m.

We also expect final dividend of 1.75 cents/share, bringing full-year dividend to 3.5 cents/share.

Given the strong cash flow and net cash position, we expect Sheng Siong to be able to maintain a 90% payout ratio in FY16. The key risk to our forecasts would be unsuccessful expansion of new stores.

Full report here. 

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