Analysts are mixed on Sheng Siong Group in lieu of shifts in consumption patterns to focus on “value for money”, following the economic toll caused by Covid-19.
DBS Group Research analyst Woon Bing Yong has maintained his ‘buy’ rating with an increased target price to $1.76 from $1.58, based on Sheng Siong’s pre-Covid P/E multiple of 21.0x, which represents the stock’s pre-Covid average forward P/E. “We expect supermarket sales to gradually normalise in FY2022 as Singapore transitions to “living with Covid-19,” Woon says.
The supermarket reported earnings of $32.5 million, up 6.6% y-o-y, for the 4QFY2021 ended December, as Sheng Siong’s gross profit margin set another record high.
See: Sheng Siong Group reports 4.8% higher earnings of $66.9 mil in 2HFY2021; declares final dividend of 3.1 cents per share
“We believe that the change in consumption patterns to support sales is positive for Sheng Siong, as the brand resonates the “value” proposition in Singapore, which should support sales psf, even as demand normalises,” says Woon. “Accordingly, we have projected sales psf to remain [around] 24% above pre-Covid levels in FY2023, which implies that future store expansions will be more profitable.”
The analyst adds that margin improvement could mitigate headwinds for Sheng Siong as well. “We believe Sheng Siong’s efforts in improving margins (through the pursuit of fresh food and house brand sales growth) could mitigate inflationary pressures and a normalisation in demand,” he says. “Indeed, the group has achieved successive q-o-q margin improvements since 3QFY2020, with it rising from 27.0% to 29.4% in 4QFY2021.”
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Meanwhile, RHB Group Research analyst Jarick Seet has kept his “neutral” rating on Sheng Siong with a higher target price of $1.51, based on 19x FY2022 P/E, from $1.46, experiencing 1% downside and approximately 4% yield.
“Sheng Siong reported better than expected FY2021 numbers with PATMI declining only 4.2% mainly due to the tighter Covid-19 restrictions in place as well as its three new outlets opened in 2021,” says Seet. “However, as vaccination rates increase, travel resumes, and while we deem Covid-19 to become an endemic, we expect FY2022 earnings to be lower, as normalisation and inflation continues.”
“In addition, with the rising inflation- which will impact the company’s input costs - we expect margins to be quite muted for FY2022 as well,” he adds.
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The analyst noted that the subsidiary in China continues to be profitable and management is working on nurturing growth of supermarket operations in Kunming, China and build further on Sheng Siong’s brand. “The company has now four stores in Kunming and will continue to seek expansion in China,” he says.
“We expect future sales and profitability to further normalise as we resume normal economic activities, especially when borders reopen and more people resume their travel plans which is likely to happen in FY2022,” Seet says. “As a result, we pegged lower our P/E from 20x to 19x FY2022 so as to price in the muted outlook for SSG.”
“That said, its normalised profit level will likely remain higher than that of pre-Covid-19 period as the company most likely continues to open more stores both in Singapore and China,” he adds.
Meanwhile, Citi Research analyst Jame Osman has a ‘sell’ rating on Sheng Siong with a target price of $1.34.
In his report, Osman notes that Sheng Siong’s operational execution remains “solid” on the back of revenue growth in the 2HFY2021.
The revenue growth was driven by higher comparable same-store sales (SSS) in 2HFY2021, new stores and from China. “The extension of mobility restriction measures by the government into November (from August) likely contributed to the elevated SSS trends. Nevetheless, the strong gross margin performance (+2.1 percentage points y-o-y) to another record level of 29.4% was impressive, underpinning Sheng Siong’s strong operational execution and good cost control,” he says.
Some risks the analyst considers include tightening of Covid-19 related restrictions in Singapore, lower-than-expected operating cost pressures, and easing competition.
At 2.21pm, shares in Sheng Siong are trading 1 cent lower or 0.66% down at $1.51.
