SINGAPORE (June 21): DBS is maintaining Sheng Siong at ‘buy’ with $1.20 target price on the back of better visibility for higher margins.
The stock is also trading attractively at 20.3x FY18 PE compared to historical average of 23x since listing. Yield remains attractive at 4.4%.
While the market is concerned with competition for shop space, closure of key stores and threat from online grocers, DBS says the critical factor driving Sheng Siong’s stock price is margins.
In a Tuesday report, lead analyst Alfie Yeo says, “We believe margins should continue expanding as its distribution centre is being expanded, driving earnings growth.”
“Higher volume rebates, higher fresh mix, economies of scale, more stock keeping units (SKUs), and better leverage to support more stores in the future will likely improve margins from current levels,” he adds.
With the HDB opening up new estates and putting up more commercial shop spaces for supermarkets, Yeo also sees more scope for store network expansion going forward, contributing to growth.
“Our target price for Sheng Siong is $1.20 based on 25x FY18F PE,” says Yeo, “The valuation is pegged at +1SD of its historical mean since listing and below regional peers' average of 30x PE.”
Shares of Sheng Siong are up 1 cent at 99 cents.
