RHB Bank Singapore's Alfie Yeo has maintained his "buy" call and $2 target price on Sheng Siong Group, following its 1QFY2023 earnings that came in within expectations.
For the quarter ended March 2023, Sheng Siong reported earnings of $33 million, down 5.3% y-o-y, while revenue was hardly changed at $357 million, down 0.4% y-o-y.
The supermarket chain operator has "continued to generate cash flow and expand its store network during that quarter, and defied the odds against the normalisation in Singapore supermarket retail sales," writes Yeo in his May 2 note.
The stock is still trading below its historical P/E mean of 19x. Yeo's target price is based on 21x current year earnings.
Yeo believes that Sheng Siong's earnings growth remains on track to meet his revenue and earnings estimate, as well as store opening assumptions from the acceleration of Housing and Development Board (HDB) projects after a slowdown during the pandemic.
"We also expect Sheng Siong to benefit from more down-trading in an environment of slower economic growth – as some shoppers will switch from higher-end supermarkets and F&B food service formats to mid-income segment supermarkets. As such, we still like Sheng Siong for its growth potential, strong cash generation and defensive earnings," adds Yeo.
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Similarly, CGS-CIMB remains positive on Sheng Siong, citing how the stock possesses "defensive qualities" and is well poised to capture potential shifts in consumer behaviour amid an economic slowdown.
In their May 2 note, analysts Ong Khang Chuen and Kenneth Tan kept their "add" call and $1.88 price target on the stock, pegged to 20x FY2024 earnings.
Re-rating catalysts include faster store openings and stronger private label product sales, while downside risks heightened industry competition, further contraction of grocery demand, and worse-than-expected margin
erosion from rising utilities costs.
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On the other hand, DBS Group Research has turned cautious, downgrading its call from "buy" to "hold", although the target price of $1.89, pegged to 21x earnings, remains.
The 1QFY2023 earnings are in line with their expectations. While same store sales continued to decline, the overall revenue was made up by new stores opening.
Gross margins held up but operating margin declined by 1.2 percentage points y-o-y because of higher utility and manpower costs.
"We see limited upside at current levels after recent strong share price performance," write Andy Sim and Chee Zheng Feng in their May 3 note.
Having said so, the analysts reaffirm their view that Sheng Siong is a "well-run quality business", and that they would potentially suggest that investors accumulate the shares at lower levels.
