Analysts from CGS-CIMB Research, Citi Research, PhillipCapital, RHB Group Research, OCBC Investment Research and UOB Kay Hian are positive on Sheng Siong Group’s prospects after the supermarket operator saw its earnings improve for the 1HFY2022 ended June.
On July 28, the group reported earnings of $67.4 million, up 2.2% y-o-y in the half-year period despite revenue returning to more normalised levels before the pandemic.
CGS-CIMB upgrades to ‘buy’
CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan have upgraded Sheng Siong to “buy” from “hold” previously as the group logged another quarter of record gross profit margins (GPM).
“We view [Sheng Siong] as a defensive play amid [the] current backdrop of rising inflation and potential economic slowdown,” the analysts write in their July 29 report.
The analysts have also upped their target price estimate to $1.85 from $1.60 previously.
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“[The] key surprise was [a] further expansion of GPM to a record 30.2% (+1.3 percentage points y-o-y), which management attributed to continued improvement of sales mix towards higher margin categories (fresh goods, private label),” say Ong and Tan.
“In our view, [the] strong GPM in 2QFY2022 reflects its successful execution of pricing strategy, with cost increments passed on to consumers while retaining its perception of value for money vs. supermarket and wet market peers,” they add, as they lift their GPM estimates for the FY2022 to 29.7%.
To be sure, the analysts now think that the group’s stronger GPM is “sustainable” compared to its previous expectations of a flattish GPM whereby there were concerns over the reversal of sales mix changes with the reopening of the economy leading to more eating out.
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“While economy reopening in 2QFY2022 has indeed led to smaller average basket sizes, Sheng Siong notes that sales mix from fresh goods remained high at 45-50%. In view of rising inflation, Sheng Siong has also been more proactive in promoting its house brand to target cost-conscious customers; this helped its revenue mix improve to 7% in 1HFY2022,” the analysts say.
The group’s net profit of $32 million for the 2QFY2022, while down by 8% y-o-y, still stood above expectations, at 61% of its full-year estimates.
Further to their report, the analysts see the recovery of construction activities as an opportunity for the group to open more stores. The group has opened two stores year-to-date (ytd), adding another 20,000 sq ft of retail area, and is set to open another in the 3QFY2022.
“With [the] recovery in construction activity, we expect the Housing & Development Board (HDB) to release more store leases for bidding in FY2022/FY2023. Sheng Siong currently has four outstanding tenders, which we think is supportive of its target to open three to five new stores per annum (p.a.) for the next three years,” say Ong and Tan.
“Sheng Siong’s China operations saw y-o-y profitability remain comparable in 1HFY2022 despite Covid-restrictions, and it plans to further expand its presence in Kunming,” they note.
Citi Research also upgrades Sheng Siong to ‘buy’ on ‘operational execution’
Citi Research analyst Jame Osman has also upgraded his call on Sheng Siong to “buy” from “sell” with a higher target price of $1.79 from $1.40.
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The upgrade comes after Sheng Siong’s post-results briefing on July 29.
“We are turning positive on the stock as we see scope for further margin improvement driven by higher fresh sales mix as well as solid cost control; [and] a pickup in [its] store network expansion as reopening drives a resumption in tenders for shop spaces,” says Osman in his July 29 report.
“We believe Sheng Siong’s defensive business acts as a solid inflation and recession hedge given its market positioning as a low-cost operator in suburban residential areas. Its net-cash balance-sheet position ($234 million for the 1HFY2022) and sustainable 4% dividend yield are also investment merits,” he adds.
To this end, Osman has lifted his earnings per share (EPS) estimates for the FY2022 to FY2024 by 6% to 23% mainly higher gross margin assumptions of 0.9 percentage points - 2.5 percentage points vs. his previous expectations for margin decline due to operational deleveraging. This is offset by cuts to his revenue forecasts of 3% to 4% for the same period.
“We also raise our risk-free rate to 2.5% (from 1.5%) and weighted average cost of capital (WACC) to 8.2% (from 7.2%). Our revised forecasts are 9% to 20% above consensus,” he writes.
To Osman, Sheng Siong is also seen as a hedge for inflation.
“Sheng Siong’s strategic focus as a low-cost operator with a focus on fresh groceries positions the company to benefit from consumer downtrading as well as increased dine-at-home trends,” he says. “Management shared that it has observed customers have recently turned more cost conscious, which has led to the company more aggressively pushing its lower priced house-brand products.”
According to Osman’s estimates, Sheng Siong’s 2QFY2022 results came in better than expected, with its Patmi accounting for 54% of its full-year forecasts.
“[The] revenue trends reflected the expected normalisation in store productivity following the re-opening of Singapore’s borders and further easing in mobility restrictions from April 1,” Osman writes in his July 28 report. “However, stronger-than-expected gross margin performance underscored Sheng Siong’s ability to control costs and execute well operationally, which led to the bottom line beat.”
PhillipCapital lifts earnings estimates for FY2022 on ‘exceptional margins’
PhillipCapital analyst Paul Chew is maintaining “buy” on Sheng Siong with a higher target price of $1.86 from $1.75 previously.
The higher target price comes as Chew lifts his earnings estimates for the FY2022 by 6% from Sheng Siong’s higher GPM.
Like his peers, Sheng Siong’s 1HFY2022 Patmi beat his expectations at 59% of his FY2022 forecast. Sheng Siong’s GPM also came in as an upside surprise, with Chew noting that they were “exceptional margins”
“Despite rising food inflation, Sheng Siong has managed to raise gross margins due to a higher sales mix of fresh food sales,” notes Chew in his July 31 report. “Sheng Siong’s competitive edge or pricing in fresh food stems from direct sourcing from overseas exporters, ability to reduce wastage from repackaging and repricing, value add from fresh food specialists and tactical purchasing due to seasonality or dislocation in the supply chain.”
As Sheng Siong looks to resume its store expansions, Chew sees this as being “supportive” of its revenue in the 2HFY2022 amid the softening revenue trend with the relaxation of work and social restrictions.
“Sheng Siong’s attractive financial metrics include return on equities (ROEs) of 27%, dividend yields at 3.9% and net cash at $234 million (as at June 30),” he writes.
OCBC lifts TP to $1.71 while retaining 'hold' call
OCBC Investment Research analyst Chu Peng is keeping her "hold" call on Sheng Siong as the group's 1HFY2022 results beat her expectations on the back of strong GPMs.
Chu has, however, upped her fair value estimate to $1.71 from $1.62 previously, as she increases her GPM estimates for the FY2022.
"Looking into 2HFY2022, we believe demand for groceries will continue to normalise, but could be potentially supported by a shift in consumption patterns towards a focus on ‘value for money’ due to inflationary pressures and a higher cost of living," she writes. "Meanwhile, Sheng Siong will continue its margin enhancement initiative by improving sales mix, increasing selection and types of house brand products, and bulk purchase. "
Sheng Siong is ‘solid defensive play against inflation’: RHB
RHB analyst Jarick Seet has kept his “buy” call and target price of $1.78 on Sheng Siong as he deems the stock a “solid defensive play against inflation”.
“We expect the rise in inflation and recessionary fears to be positive for Sheng Siong, as it should help mitigate any dampener stemming from Singapore’s border and economic reopening. We expect Sheng Siong to also be able to maintain margins and pass on costs to its customers, as it has previously done in the past – and proven as of 1HFY2022,” he writes in his Aug 1 report.
“This counter presents a solid defensive option, especially in such volatile market conditions,” he adds.
Sheng Siong should continue to enjoy 'healthy demand' for groceries: UOB Kay Hian
UOB Kay Hian analyst John Cheong is also keeping his "buy" call on Sheng Siong after the group's 1HFY2022 earnings stood within expectations.
Sheng Siong's earnings of $67.4 million formed 51% of Cheong's estimates for the FY2022.
In his report dated Aug 1, Cheong has kept his target price estimate unchanged at $1.91, the highest among the analysts featured here.
As the analyst maintains his earnings estimates, he sees the group benefitting from the inflationary pressures as he believes more consumers may be prompted to dine at home instead.
"Amid a cautious spending outlook, there may be belt-tightening from consumers to focus on essentials and to make price-conscious choices. Consumers may prepare meals at home more frequently or look towards house brand products for affordable value products to ease inflation and wallets," the analyst says.
On Sheng Siong's higher interim dividend of 3.15 cents, 1.6% higher than the previous year's interim dividend of 3.10 cents, Cheong sees the increase as a "positive signal" that the group's future earnings should remain healthy.
As at 10.18am, shares in Sheng Siong are trading 2 cents higher or 1.25% up at $1.62.
