Supermarket operator Sheng Siong is no longer the super stock that analysts are looking at. With an end in sight for the Covid-19 pandemic, the stock is likely to normalise from here on, say analysts.
Already, in its latest 1HFY2021 results ended June, Sheng Siong recorded an 11.9% y-o-y drop in earnings to $65.9 million, bringing earnings per share to 4.39 cents, an 11.8% y-o-y decline from the previous year. This was as revenue fell by 8.8% y-o-y to $681.7 million, coming down from last year’s high base that was underpinned by an elevated demand from consumers panic buying as the government announced the circuit breaker measures.
Sheng Siong has also declared an interim dividend of 3.1 cents per share for 1HFY2021, which represents a dividend payout ratio of 71%. This is down from the 3.5 cents distributed last year.
See: Sheng Siong Group sees 11.9% dip in 1H2021 earnings to $65.9 million; declares interim dividend of 3.1 cents
Although Singapore has been through a strict Phase 2 (Heightened Alert) twice this year, which many have coined as a “semi-lockdown”, Singaporeans and the government are already experienced in preparing for the event. This means no more panic buying and overstocking.
With that, Maybank Kim Eng is initiating a “sell” recommendation on Sheng Siong with a target price of $1.33, as it is unlikely that the group will see another windfall year as more people will dine out as the ban should be lifted in 4Q21 once vaccination rate passes 80% in the city.
Also, near-term catalysts are limited as new store opening visibility is low.
Analyst Kareen Chan says, “We prefer a better entry point and/or take profit on strength given its near- to medium-term earnings downcycle, as well as potential market rotation to post-Covid beneficiaries.”
See: Citing "best days over", Maybank Kim Eng calls "sell" on Sheng Siong
Meanwhile, RHB Group Research has downgraded its call on Sheng Siong to “neutral” from “buy” with a lower target price of $1.61 from $1.95, following its declining 1HFY2021 results.
Analyst Jarick Seet says, “We expect this trend to continue as the vaccination rate increases, and while we deem Covid-19 to inevitably become an endemic.”
As much as Sheng Siong has been a beneficiary of the pandemic with consumers heightened need to buy groceries, its growth driver – new store openings – is undoubtedly affected by the pandemic. The group typically opens three to five outlets yearly, but this pace should slow down this year due to the slower pace in construction and previous delays in building activities causing job backlogs to pile up.
Seet notes that four new shop tenders have been launched by HDB and Sheng Siong has participated in all, but the results of the tenders have yet to be disclosed.
With Singapore moving towards an endemic, Seet says, “As a result, we think FY2022 sales will continue to decline as the periods of the lockdown in FY2021 are not likely to be similar to that of FY2022.”
“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,” he adds.
Sharing similar sentiments, CGS-CIMB Research is keeping its “hold” call on Sheng Siong with an unchanged target price of $1.60.
Analyst Ong Khang Chuen says, “We believe the near-term elevated demand has been priced in, and reiterate Hold on Sheng Siong, as we see limited positive earnings catalysts in the near term.”
The latest Phase 2 (heightened alert), which is expected to be in place until Aug 18, could point towards continued strong revenue base in 3QFY2021. But Ong notes that with two-thirds of Singapore’s population set to be fully vaccinated by Aug 9 and the economy set to reopen in mid-August, home grocery expenses are expected to normalise. Hence, Ong expects the group’s revenue for 3QFY2021 to expand 3.6% y-o-y, before declining 2.8% y-o-y in 4QFY2021.
To that end, store openings remain slow and Ong forecasts only one store addition in Singapore for FY2021, before its expansion returns to a more normalised pace of four new stores per annum from FY2022.
Meanwhile, the group aims to nurture growth in Kunming, China with two new stores this year, bringing its total store count there to four by year-end. “While its China operation is profitable (0.6% profit contribution to group in FY2020), we are cautious on this move, as China’s supermarket industry is facing rising pressure from grocery e-commerce players,” adds Ong.
On the other hand, PhillipCapital is more upbeat on the stock as it maintains its “accumulate” rating on Sheng Siong but with a lower target price of $1.69 from $1.71.
Analyst Paul Chew likes the stock for its record gross margins in 1HFY2021. “Gross margins of 28.9% were the highest by far, surpassing their previous high of 28.1% at the height of the pandemic in 2QFY2020 due to pantry loading. Margin expansion was driven by a higher mix of fresh-food sales and house brands,” he says.
However, similar to the other analysts, Chew is concerned about the group’s slow store openings this year, saying that with the outcome from the tenders likely to be known in three months and with the group needing about one to two months to open a new store, it is likely that any new stores will only materialise at year-end.
Chew is positive on Sheng Siong as borders remain shut and dining restrictions are still effective, which should lead to more frequent dining and time spent at home, fuelling grocery demand.
For DBS Group Research, Sheng Siong is still a “buy” with a target price of $1.77, as the stock remains to be its preferred grocery pick as consumers favour value.
Analyst Woon Bing Yong says, “Pandemic restrictions leading to the increased prevalence of work from home have in turn boosted demand for groceries. Expect Sheng Siong to record a respectable 3QFY2021 driven by the shift to Phase 2 (Heightened Alert) from July 22 to Aug 18.”
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Woon is unfazed by Sheng Siong’s slight dip in 1HFY2021 earnings. “Although normalising, we expect FY2021 earnings to remain elevated compared to pre-Covid years, driven by higher store count and strong sales psf. In our view, the more transmissible Delta variant combined with a government keenly aware of the risks of an overburdened healthcare system may provide upside to the stock.”
Meanwhile, numerous reports have found a shift in consumption patterns to focus on ‘value for money’ following the economic toll caused by Covid-19. “We believe this is positive for Sheng Siong as the brand resonates with the value proposition in Singapore and could serve to support sales psf even as demand normalizes. Accordingly, we have projected for sales psf to remain about 17% above pre-Covid levels in FY2023 which could translate to more profitable future store expansions,” adds Woon.
As at 11.30am, shares in Sheng Siong are trading at $1.54 or 5.8 times FY2021 book with a dividend yield of 3.4%, according to Maybank Kim Eng’s estimates.
Photo: The Edge Singapore/ Albert Chua
