Brokers' Call

Sheng Siong's margins are on the uptrend but the market is concerned about competition for shop space and the online threat.
Sheng Siong's margins are on the uptrend but the market is concerned about competition for shop space and the online threat.PHOTO: LIANHE ZAOBAO

CapitaLand Mall Trust

Broker: DBS Group Research

Call: Buy

Target Price: $2.17

CapitaLand Mall Trust's (CMT) share price has been flat this year, lagging behind both the S-Reit index and Singapore 10-year government bonds.

The underperformance is believed to be due to investors' concerns about potential downside earnings risk, given the weak operating outlook.

While the street remains divided on the stock, given the uncertainties of the impact from surging new retail supply over 2017-2019, the new supply may not be as threatening to CMT. According to our analysis, it is estimated that only less than 50 per cent of the incoming new supply will be relevant competition to CMT's properties.

The distribution per unit estimates are conservative and the new chief executive officer could bring in fresh blood with expertise in managing retail malls in China, a more dynamic market.

More aggressive rate hikes than those widely expected may cause ripples in the market. CMT, being a proxy for interest-rate investment, may then suffer from selling pressure.

Raffles Medical Group

Broker: CIMB

Call: Sell

Target Price: $1.25

Even after an approximate 5 per cent share price retreat since its uninspiring results in the first quarter of 2017, Raffles Medical is still trading at 25.8x its enterprise value/earnings before interest, tax, depreciation and amortisation for the 2018 calendar year. But it remains above its 10-year mean of 20x. As valuations are still lofty, the shares have not hit the bottom yet.

Risks come from cost pressures from Singapore hospital extension, additional costs from China in the first half of 2018, and lacklustre domestic operations.

The forecast for financial years 2017-2019 revenue growth is at 8 per cent to 12 per cent per annum even as the first quarter's revenue dipped 2 per cent, as expansion projects should boost top-line growth.

The cost impact from the group's Singapore hospital extension and the upcoming 700-bed Chongqing hospital is lacking in consensus, partly because this is the first time Raffles Medical is expanding/building a new hospital since its flagship Raffles hospital and there is little to benchmark against. Costs from the Chongqing hospital for financial years 2018-2019 have lowered the earnings per share by 9 per cent to 16 per cent.

Sheng Siong Group

Broker: DBS Group Research

Call: Buy

Target Price: $1.20

Analysis is more positive on Sheng Siong on the back of better visibility for higher margins. It is believed that expansion of its distribution centre will grow and sustain gross margins.

Margins remain on the uptrend supported by the increase in direct sourcing, bulk handling, and fresh mix, contributing to earnings growth. Stock is trading attractively at a price to earnings ratio of 20.3x the forecast earnings for financial year 2018, compared with the historical average of 23x since listing. Yield remains attractive at 4.4 per cent.

The market is concerned about competition for shop space, the closure of key stores (Verge and Woodlands), online threat and the threat of gross margins being unsustainable.

However, the critical factor driving Sheng Siong's stock price is margins. Margins need to keep expanding as its distribution centre is expanded, driving earnings growth.

Added warehousing capacity supporting its margins over the next few years from its warehouse expansion is a potential catalyst.

Higher volume rebates, higher fresh mix, economies of scale, more stock keeping units, and better leverage to support more stores in the future will likely improve margins.

Excessive discounts and promotions in the market by competitors will ultimately result in lower margins.

A version of this article appeared in the print edition of The Straits Times on June 26, 2017, with the headline 'Brokers' Call'. Print Edition | Subscribe