OCBC Investment Research is keeping its “buy” call on supermarket chain Sheng Siong Group with an unchanged fair value estimate of $1.04 despite competition heating up in Singapore’s grocery landscape. In late July, Amazon.com muscled its way into the scene with the launch of its Prime Now express delivery service via its mobile app, joining other e-commerce players such as online grocery service provider RedMart.

To survive the onslaught, analysts say brick-and-mortar supermarkets will have to eventually transition from aisles to apps.

“While we believe the traditional brick and mortar model for supermarkets is relatively stable for now, having an online platform is an increasingly important avenue for growth ahead,” says OCBC lead analyst Jodie Foo in a report on Thursday.

Already, the major supermarket players here have set up their own e-grocery platforms. But Foo says they first need to optimise their systems. “Otherwise they risk facing margin erosion and may not be able to achieve desired ROI on automation investments fast enough,” she adds.

The way Foo sees it, Sheng Siong and other brick-and-mortar retailers are likely to be facing challenges, given the complexity and differences in supply chain requirements.

“Several factors including the technology, assortment analysis, and order fulfilment rates have to be robust for grocery e-commerce,” she notes.

For now, Foo says Sheng Siong still holds an edge in the fresh produce space, where the online challengers have limited offerings. And with a planned warehouse extension to provide more cold storage space in the works, Sheng Siong could strengthen its advantage in this segment.

"In addition, the group has a variable cost structure and continues to look at reducing costs through various ways like automation for efficiency and lowering dependency on manpower, increased direct sourcing and bulk handling to lower input costs,” Foo says.

In a statement accompanying its latest results announcement on July 27, group CEO Lim Hock Chee said the supermarket chain will be changing its sales mix to a higher proportion of fresh produce as well as increasing its direct purchasing and bulk handling in order to improve on its operating margin.

Sheng Siong in the 2Q ended June saw its earnings grow by 6.1% to $16.1 million on the back of four new store openings, bringing earnings for 1H17 up 5.3% to $33.2 million.

As at 12.04pm on Thursday, shares in Sheng Siong are trading half a cent higher at 92.5 cents, implying a P/E of 21.6x and a dividend yield of 3.7%.

Year to date, the stock has fallen 2.1%.


This story first appeared on The Edge Markets