Citi Research analyst Jame Osman reiterates his “buy” call for Sheng Siong Group OV8 , raising his target price from $1.79 to $1.92 on the basis of the grocery retailer’s “solid operational execution” in overcoming investors’ concerns over a post-pandemic normalisation in grocery consumption.
Osman also notes that Sheng Siong has multiple levers for further growth, while its defensive business and market positioning as a low-cost supermarket located mainly in suburban residential areas act as a solid inflation and recessionary hedge.
In addition, its growing net cash balance of $283 million as at end 1QFY2023 and sustainable 4% dividend yield are also investment merits.
However, the analyst has trimmed his FY2023 to FY2024 forecasts by 2% to 3% to factor in higher utilities and staff costs which are reflected in 1QFY2023 trends. He has also rolled over his valuation base and lowered his capex forecasts.
Sheng Siong’s shares have risen 8% over the past year, and its consistent gross margin expansion over the past decade was driven by three factors — cost management initiatives associated with its Mandai distribution centre, increasing contribution from higher-margin fresh products, and operational leverage from store network expansion.
Sheng Siong’s management has expanded its house-brand portfolio of about 1,600 products, which represents about 7% of its revenue, where margins are about 10 to 15 percentage points higher than branded products to drive further margin expansion, a move to hedge against consumers turning more cost-conscious.
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Fresh revenue mix has increased to about 45% levels, and with its current network of 68 stores in Singapore, the grocery retailer is looking for a larger distribution centre to accommodate its network of more than 100 stores, and to incorporate greater automation.
“We expect this will drive longer-term operational leverage,” says Osman.
Sheng Siong’s management says that store bidding has also remained rational, with smaller players behaving less aggressively relative to previous years. Meanwhile, they have opened one new store in over one calendar year, five commercial tenders over the next six months, bringing it to a total of 13 over FY2023 to 1HFY2024.
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In addition, Sheng Siong has opened its fifth store in China, and will continue to build a network with a view to invest in a distribution centre to drive similar operational leverage over the long term.
“We expect Sheng Siong’s execution to remain strong with management’s traditionally keen focus on cost control; and earnings growth supported by gross margin expansion and net store openings,” says Osman.
As at 3.07pm, shares in Sheng Siong are trading flat at $1.63.
