RHB Group Research analyst Jarick Seet has kept his “neutral” call on Sheng Siong as he expects the supermarket operator’s future sales and profitability to further normalise as economic activities resume.
Seet has also kept his target price unchanged at $1.51, based on its FY2022 P/E of 19x. Seet’s target price also represents an upside of 0% from the counter’s current share price.
Amid the easing Covid-19 restrictions and the transition into living with Covid-19 as an endemic, Seet expects Sheng Siong to post a 9.7% y-o-y decline in its earnings for the FY2022 ending December.
The lower earnings are also partially attributable to the higher cost of goods on the back of rising inflation, the analyst writes in his April 11 report.
“We expect future sales and profitability to further normalise as normal economic activities resume, especially when borders reopen and more people continue their travel plans – this is likely to happen over the remaining course of this year,” says Seet.
“That said, Sheng Siong’s normalised profit levels will likely remain higher than that of the pre-Covid-19 period, in our view, as the company will likely continue to open more stores both in Singapore and China,” he adds.
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Sheng Siong is likely to continue its expansion into China as its Chinese subsidiary continues to be profitable. The group’s management is also working on nurturing the growth of its supermarket operations in Kunming, where it currently has four stores, says Seet.
In the 1HFY2022, Sheng Siong will see two stores begin operations from the three leases it secured in 2021. Its management will continue to search for suitable retail spaces in Singapore, particularly in areas where the group does not have a presence in, notes the analyst.
“Management is also committed to diversifying its supply sources to reduce risks of disruptions and ensure stable input prices,” he writes.
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Further to his report, Seet sees inventory shortages in the event of major supply chain disruptions as one of the group’s downside risks. The inability to find affordable areas to lease as well as price wars from its competitors are also key risks to Sheng Siong’s share price.
As at 1.43pm, shares in Sheng Siong are trading flat at $1.51 or an FY2022 P/B of 5.2x. According to Seet’s estimates, Sheng Siong’s dividend yield for the FY2022 stands at 3.7%.
