DBS Group Research analysts Andy Sim and Chee Zheng Feng have upgraded their call on the Sheng Siong Group OV8 to “buy” from “hold” due to “attractive industry dynamics and reasonable valuation”.
The group is also deemed as a defensive hedge against a potential recession.
While the analysts have kept their target price unchanged at $1.89, they see Sheng Siong’s shares as attractive for re-entry amid the recent selloff. The target price is based on a P/E multiple of 21x on Sheng Siong’s estimated earnings for FY2023, at -1 standard deviation (s.d.) of the group’s average pre-Covid-19 P/E multiple.
As at the time of the analysts’ report on June 19, shares in Sheng Siong closed at $1.63 on June 16. However, shares in the group have since risen to $1.69 as at 1.13pm on June 20.
That said, there are still several positives on the group, which is the third-largest supermarket chain in Singapore.
The group has successfully established itself as the go-to value grocery chain as its scale enables it to benefit from significant economies of scale in terms of procurement while its suburban HDB footprint, which has low rental rates, puts it in a good spot to supply price-competitive offerings.
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Sheng Siong’s new stores are also well-positioned to support a steady revenue and earnings growth. The group has opened one new store year-to-date (ytd) and is expected to open at least two new stores by the end of the year. There are also six HDB-located stores that are up for bidding with tender completion by the end of the year.
“Based on our assessment, we believe these stores offer attractive growth opportunities. On average, we estimate that each store can deliver $14 million and $1.3 million to top and bottom-line respectively upon full ramp up,” write Sim and Chee.
While the doubling of utility costs are expected to put margin pressures for Sheng Siong in FY2023, easing natural gas prices should mean that the group’s electricity costs should normalise by the end of the year when its electricity contract is up for renewal.
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“Assuming natural gas prices stay at current level, we estimated that Sheng Siong can enjoy [around] $8 million [in] cost savings in FY2024,” the analysts note.
“Overall, with the above estimates in mind, we believe our forecast for FY2024 which assumes $9 million bottom-line growth in FY2024 is an achievable one,” they add.
