SINGAPORE (Mar 20): Malaysia’s two week lockdown led to panic-buying at grocery retail stores in Singapore amid worries of food shortage.
This could have been positive news for investors of Sheng Siong Group, although the counter’s share price has sunk some 17% over the past three months in tandem with the ongoing market sell-down.
RHB Group Research, for one, views this as a short-term boost for the group in terms of sales. Yet, the brokerage is not discounting the challenges that lie in front of the group, especially as countries continue to close their borders and impose travel restrictions in an attempt to contain the Covid-19 outbreak.
In particular, Cai hones in on Malaysia - which remains key to Sheng Siong’s fresh items segment.
“Majority of the poultry and vegetables are imported from Malaysia. Approximately 45% of Sheng Siong’s annual sales is derived from fresh produce,” says RHB analyst Juliana Cai in a Wednesday report.
“As such, we estimate 10-15% of sales would be attributed to poultry and vegetables imported from Malaysia,” she shares.
Looking ahead, Cai notes that the the impact of Malaysia’s lockdown on the group’s sales and earnings are less clear as consumers are likely to turn to other alternatives instead.
“Consumers are likely to substitute these shortfalls with other food alternatives which could be higher margin products (eg seafood, beef, pork) or lower margin products (eg frozen chicken, canned food),” says Cai.
“We estimate the impact on sales would be at a high single digit in the worst case scenario of the prolonged border control in Malaysia,” she adds.
Despite this, Cai is quick to note that all is not doom and gloom for the group as its non-fresh items segment is less likely to be impacted by the lockdown.
“As these items are less or non-perishable, both Sheng Siong and the suppliers are likely to carry additional stock supplies in their inventories to cope with the temporary disruption,” she says.
Cai adds that major suppliers are also likely to direct more productions to other geographies in the event of a prolonged Malaysian lockdown.
“Given Malaysia’s movement control order only lasts for two weeks, we do not see major disruptions in the supply chain as Sheng Siong has increased its days in inventory and diversify its suppliers in anticipation of such situations,” says Cai.
Although Cai remains cautious about a continued downtrend in terms of share price, she argues that Sheng Siong’s fundamentals are still intact as the demand for food staples remains “fairly resilient.”
“Barring any prolonged lockdown in regional countries, we do not foresee any major impact on earnings,” says Cai. “sector. While share price has come off along with the market sell-down, we note that earnings profile for the company is still very resilient,” she adds.
The brokerage is also banking on the work-from-home trend and general avoidance of crowded areas and gatherings during this period to support the group’s grocery retail sales.
RHB is reiterating its “buy” call on Sheng Siong with a target price of $1.42, representing a 38% upside for the stock. The group also remains the brokerage's top consumer cyclical pick.
As at 12.45pm, shares in Sheng Siong are trading three cents higher, or 2.9% up, at $1.05. This translates to a price-to-book (P/B) ratio of 4.7 times and a dividend yield of 3.9% for FY2020F according to RHB valuations.
