UOB Kay Hian analyst John Cheong has upgraded his recommendation on Sheng Siong Group to “buy” as he believes that rising prices on the back of higher inflation will see a “healthy demand” for groceries.
“On the back of inflationary pressures, consumers are increasingly concerned with the higher cost of living, and may choose to dine in more at home to reduce excessive spending,” Cheong writes in his report dated July 13.
The inflation-induced demand should offset the moderation in demand from the easing of Covid-19 restrictions, he adds.
In addition to his upgrade, Cheong has upped his target price on Sheng Siong Group to $1.91 from $1.69 previously. The higher target price is pegged to the group’s FY2023 P/E of 21x or a five-year average mean P/E.
“We roll over our valuation base year from 2022 to 2023,” says Cheong.
In his report, the analyst also points out that the supermarket operator showed a steadily growing gross margin, which is “good evidence of its ability to pass on rising costs”.
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“We believe that given the consumer staples nature of Sheng Siong Group’s products, it will likely be able to raise prices quickly to pass on costs and preserve margins. In addition, the demand for higher margin fresh products should continue to grow as these are the main products required for cooking at home,” he continues.
For the 1QFY2022 ended March, the group’s gross profit margin (GPM) improved by 1.0 percentage points to 28.7% due to a favourable sales mix.
“All in all, the increase in item costs coupled with the ability to maintain gross margin should translate into higher earnings moving forward,” Cheong adds.
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With that, Cheong has raised both his revenue and earnings estimates for the FY2022 to FY2024 by 4%. “[This is] to account for a stronger demand in groceries as more consumers choose to dine at home to reduce excessive spending amid a rising inflation environment,” he says.
“We are roughly annualising the 1QFY2022 earnings as we believe the strong earnings momentum will continue into the rest of the year,” he adds.
Further to his report, Cheong notes that retail sales for supermarkets and hypermarkets continued to record a 0.6% m-o-m growth, according to the latest retail sales index published by the Department of Statistics (SingStat) on July 5.
“The m-o-m growth is noteworthy as this is achieved amid a major relaxation of Singapore’s Covid-19 public health measures, which took effect from April 26 where there will no longer be a group size limit for mask-off activities and safe distancing requirement,” says Cheong.
“Although the growth is marginal vs the 10.3% decline y-o-y, we note that the y-o-y data is not an accurate comparison,” he adds, noting that the group size for dining-in was capped at five and eight persons in the first two weeks in May. Dining-in was then suspended from May 16 as part of the Phase 2 Heightened Alert measures.
“However, in May [this year], there were no dine-in restrictions for vaccinated persons,” he continues.
In the analyst’s report, catalysts to Sheng Siong Group’s share price include higher-than-expected new store openings and same-store sales growth and higher dividends.
As at 10.53am, shares in Sheng Siong Group are trading flat at $1.62.
