PhillipCapital analyst Paul Chew has upgraded his recommendation on the Sheng Siong Group to “buy” from “accumulate” with an unchanged target price of $1.69.
“Sheng Siong Group enjoys [an] attractive return on equities (ROEs) of 25%, dividend yields at 3.2% and net cash at $215 million (as at September 2021),” he writes in a Nov 1 report.
To Chew, the upgrade comes amid the group’s recent share price weakness, which he deems as an opportunity to buy into the stock.
For the 3QFY2021 ended September, the supermarket chain reported revenue of $348.1 million, up 6.4% y-o-y.
See: Sheng Siong reports 3QFY2021 earnings of $34.4 million, up 8.3% y-o-y
Earnings for the period, similarly, increased by 8.3% y-o-y to $34.4 million.
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To Chew, the group’s revenue and PATMI for the quarter beat his estimates for the FY2021, with 9MFY2021 revenue and PATMI coming in at 85% and 91% of his FY2021 estimates respectively.
To this end, Chew has upped his PATMI estimates for the FY2021 by 15% to $126.9 million.
He has also lifted Sheng Siong Group’s revenue forecast for the FY2021 by 11%. In addition, Chew has upped his gross margin estimates by 0.5 percentage points to 28.3%.
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He has so far kept his estimates for the FY2022 unchanged.
“The recent spike in cases is accelerating Sheng Siong’s market share in fresh food from wet markets. We believe this is a secular trend. Our target price is unchanged at $1.69, based 5-year historical average of 25 times price-to-earnings (P/E). The target price is based on FY2022 earnings, to reflect more normalised earnings as borders re-open,” writes Chew.
While the group registered another record in its gross margins during the 3QFY2021, Chew is concerned at the lack of new stores opened by the group in 2021.
To him, the lack of new store openings will dampen sales growth in the FY2022.
However, he adds that the group’s “competitive edge in managing their fresh food supply chain can elevate gross margins higher than pre-pandemic levels”.
“Ability to source directly and diversely, scale in procurement and frequent refreshing and delivery of inventory, are some of the competitive edge Sheng Siong Group enjoys in fresh food,” he adds.
Near-term headwinds, according to Chew, include the lack of new stores, as well as the uncertainty over normalised earnings once the pandemic is over.
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DBS Group Research analysts Woon Bing Yong and Paul Yong have kept “buy” with a lower target price of $1.58 from $1.77 previously.
The lower target price is based on Sheng Siong Group’s pre-Covid P/E multiple of 21.0 times, which represents the counter’s pre-Covid average forward P/E.
Woon and Yong are also expecting supermarket sales to gradually normalise as Singapore transitions to living with Covid-19 as an endemic.
However, according to the analysts, numerous reports have found that consumers are now focusing on “value for money” following the economic toll caused by Covid-19.
This, they believe, is positive for Sheng Siong Group as the brand resonates with the “value” proposition in Singapore and should support sales psf even as demand normalises.
“Accordingly, we have projected sales psf to remain [around] 17% above pre-Covid levels in FY2023, which implies future store expansions will be more profitable,” they write in a Nov 1 report.
Based on the group’s current share price of $1.42 as at Oct 29, the counter remains a good dividend play with a yield of around 4% per annum.
“Our forecasts show that the group is on track to pay a dividend of over 6.0 cents a share in FY2021, which would mark the second consecutive year that dividend exceeds 6 cents per share,” they write.
The way they see it, their estimates are above consensus’ estimates as they believe normalisation will take place at a slower pace with Singapore’s transition to living with the pandemic.
Analysts from CGS-CIMB Research and RHB Group Research have kept “hold” or “neutral” on Sheng Siong Group as they see the “good times coming to an end”.
CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan have reduced their target price estimate to $1.50 from $1.60, still based on 22 times FY2022 P/E, or 1 standard deviation above its historical five-year mean.
Ong and Tan’s current recommendation comes as they believe the elevated demand in the near-term has been priced in.
They add that they also see limited positive earnings catalysts in the near term.
That said, the elevated demand seen could persist till the 4QFY2021 due to the tighter mobility restrictions.
To this end, Ong and Tan have upped their earnings per share (EPS) estimates by 8.7% for the FY2021 to account for the heightened mobility restrictions.
Nevertheless, with the expected transition to endemic living with Covid-19, Ong and Tan expect to see a further easing of restrictions., as well as the group turning negative in the FY2022, with demand tapering off.
“We also see intensifying threats from online grocery shopping platforms, as online sales proportion of the supermarkets and hypermarkets industry continued to tick upwards (Aug 2021: 14.0%) with accelerated pace of e-commerce adoption due to the pandemic,” they write.
With this, Ong and Tan have cut their EPS estimates for the FY2022 and FY2023 by 1.7% to 3.8% as they lower their store count growth assumptions.
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Finally, RHB analyst Jarick Seet has lowered his target price estimate to $1.46 from $1.61, with his new target price based on 20 times Sheng Siong Group’s FY2022 P/E.
Like the rest of the analysts, Seet expects FY2022 to be a year of normalisation for the group as normal economic activities return.
“As such, we cut our valuation to 20 times FY2022 P/E (from 23 times). That said, Sheng Siong Group’s normalised profit levels ahead may be higher than that booked prior to the pandemic – as it will likely continue to open more stores in Singapore and China,” Seet writes in a Nov 1 report.
The group opened one store in Kunming, China in August and will open another one this quarter.
Shares in Sheng Siong closed 5 cents higher or 3.5% up at $1.48 on Nov 2, or 5.19 times FY2021 P/B and dividend yield of 4.25%, according to CGS-CIMB’s estimates.
Photo: Albert Chua/The Edge Singapore
