Last year, when the Covid-19 pandemic hit Singapore, many businesses suffered. They were forced to halt their businesses for months, especially during the “circuit breaker”. But a few have emerged as beneficiaries amid the havoc, such as supermarket operators.
Deemed as an essential service, supermarkets have remained open throughout. Staying home was crucial even as lockdown measures were lifted, and this quickly became the new norm as companies adapted to work-from-home arrangements. With that, the supermarkets thrived, as people stocked up on more goods and groceries.
As Singapore moves towards an endemic, what would it mean for the supermarkets?
Regular-priced stocks
As the saying goes, what goes up must come down. That seems to be the case for local supermarket operator Sheng Siong Group. The recently announced 1HFY2021-ended-June results showed clear signs that the group is normalising from its high last year. Earnings for the period came in 11.9% lower y-o-y at $65.9 million, translating to earnings per share (EPS) of 4.39 cents, an 11.8% drop y-o-y.
Although gross margins were at a record high of 28.9%, revenue still came in 8.8% lower y-o-y at $681.7 million, down from last year’s high base that was underpinned by elevated demand from consumers’ panic-buying as the government announced the circuit breaker measures.
Although its earnings remain to be above pre-Covid times, this is likely the point where things start to become more mundane for the stock.
Analysts are rather mixed on Sheng Siong as this may signal that its heydays are over, but with a higher base compared to pre-Covid times, the stock may still have much to offer.
Maybank Kim Eng has initiated a “sell” recommendation on Sheng Siong with a target price of $1.33, as analyst Kareen Chan believes that it is unlikely that the group will see another windfall year, given that people are more likely to dine out when the ban is lifted in 4Q2021 once the vaccination rate passes 80% in the city.
Also, near-term catalysts are limited as new store opening visibility is low. Constructions are delayed and fewer shop tenders were launched by the Housing Development Board (HDB).
“We prefer a better entry point and/or take profit on strength given its near- to medium-term earnings downcycle, as well as potential market rotation to post-Covid beneficiaries,” says Chan, who sees the supermarket industry as less favourable now.
Meanwhile, RHB Group Research and CGS-CIMB have “neutral” and “hold” calls with target prices of $1.61 and $1.60 respectively.
As Singapore moves towards an endemic, the group has to start relying on other growth factors, aside from consumer sentiment. Its new store openings have generally contributed to growth, but with store openings expected to be low this year, near-term growth will be affected.
CGS-CIMB’s analyst Ong Khan Chuen expects only one store opening this year in Singapore.
On the other hand, PhillipCapital and DBS Group Research are more upbeat on the stock as they keep their “buy” recommendations.
Although PhillipCapital’s Paul Chew likes the stock for its record gross margins, and the current restrictions and border closures that should fuel grocery demand, he too is concerned about the group’s lack of store openings so far this year.
As for DBS’ Woon Bing Yong, he believes that with work-from-home measures becoming a norm, the demand for groceries will increase. He expects Sheng Siong to record a “respectable 3QFY2021” driven by the current Phase Two (Heightened Alert). He maintains Sheng Siong as the preferred grocery stock pick.
Woon is unfazed by Sheng Siong’s slight dip in 1HFY2021 earnings. “Although normalising, we expect FY2021 earnings to remain elevated compared to pre-Covid years, driven by higher store count and strong sales psf. In our view, the more transmissible Delta variant, combined with a government keenly aware of the risks of an overburdened healthcare system, may provide upside to the stock.”
Overall, Sheng Siong is aware of its lack of new store opening this year. In its results media release, Sheng Siong’s CEO Lim Hock Chee says: “While our expansion plans in Singapore have been impacted due to the pandemic and the release of fewer tenders of new HDB shops, we continue to be on the lookout for new retail spaces, particularly in areas where we have yet to build a presence. Our expansion plan in China is also moving forward, having recently announced that we have signed lease agreements to set up two new stores in China.”
Sheng Siong has on July 30 acquired a property at Jalan Berseh for a consideration of $17.23 million.
Where is the upside?
It is not just Sheng Siong that is seeing this trend. Dairy Farm International (DFI), operator of Cold Storage and Giant supermarkets, Guardian pharmacies and 7-11 chain of convenience stores, is experiencing a dip too.
However, in DFI’s case, it did not enjoy a surge in earnings like Sheng Siong did last year. Unfortunately for the group, it was all downhill from the time the pandemic struck its markets.
In its 1HFY2021 ended June results, earnings plunged 85% y-o-y to US$17 million ($23.1 million) from US$115 million a year ago. This was after 1HFY2020 recorded a 35% y-o-y drop from 1HFY2019. Even in its FY2020 results, earnings were 16% lesser y-o-y at US$271 million.
For all the periods mentioned that saw a drop in performance, the group blamed the Covid-19 pandemic. “Ongoing restrictions related to the Covid-19 pandemic imposed by governments across our markets have significantly affected trading in all markets, impacting the group’s overall performance in the period,” DFI Chairman Ben Keswick said in its latest 1HFY2021 results announcement on July 29.
Despite its lacklustre performance throughout the pandemic period, UOB Kay Hian is keeping its “buy” call on DFI but with a lower target price of US$4.53 from US$5.19. Analyst Adrian Loh noted that there were more than just a few issues that affected the group’s 1HFY2021 results, which came in below expectations. These include US$30 million in restructuring costs in Indonesia; lower government grants and rental rebates in 1H2021 compared to last year; difficult trading conditions in F&B for its associate Maxims in Thailand and Singapore; and the normalisation of spending patterns in grocery business in 1H2021 versus a high base in 1H2020. Additionally, there were higher costs associated with Covid-19, such as increased usage of personal protective equipment (PPE), more intensive levels of cleaning/sanitising and temporary accommodation.
Overall, Loh likes the stock as he believes that the discount to its average PE is fair and reasonable given the continued Covid-19-related challenges that the company faces in its various business segments and geographies.
“As the region progresses towards having a greater proportion of its population vaccinated, and further evidence of its business transformation surfaces, we should expect DFI to trade at higher multiples. One of the positive takeaways from the result was the company’s continued investment in e-commerce which has started to reap rewards,” says Loh.
Conversely, DBS Group Research and CGS-CIMB have both downgraded their calls to “hold” from “buy” with target prices of US$4.78 and US$4.00 respectively.
DBS’ Woon says: “We think the grocery retail business may face challenges ahead in the form of normalising demand in the regions where the pandemic situation has stabilised. Competition is also fierce in both the online channel (for Yonghui) and offline channel (for Indonesia).”
As DFI is undergoing a transformation to offer more in-house brands with better value, Woon thinks that this is not an “overnight” transformation. “We think the pandemic may have changed consumption patterns in favour of value. In our view, DFI’s price investment strategy may lead to a period of lower margins and will need time to bear fruit as cost structure changes are implemented,” he adds.
CGS-CIMB’s Ong is on the same page, and he believes that with the transformation taking shape, earnings recovery too will take some time. “2HFY2021 should remain challenging; we forecast DFI’s core net profit to fall 8% y-o-y. The health and beauty segment, which was the largest profit contributor pre-Covid, could see earnings recovery y-o-y in 2HFY2021 given the low comparative base, but would remain significantly impacted by the lack of Chinese tourist arrivals in HK, in our view,” he says.
Consumer staples sector
With mixed reactions on supermarket operators, what are some consumer staple stocks that investors can look at to invest in some of the sector’s headwinds?
The way DBS Group Research sees it, Wilmar International is set to reap the benefits after a decade of investments to deliver steady profit performance. Lead analyst William Simadiputra says: “Wilmar’s strong earnings growth momentum from both its China and ex-China operations should support Wilmar’s share price performance and close the valuation gap with its China subsidiary YKA. Beside its well-integrated platform, we think Wilmar should trade at higher multiples on better market liquidity than YKA.”
“Wilmar’s profitability has been expanding in the last three years and is expected to remain firm from its growing exposure to the higher-margin branded grocery food segment. Wilmar is expected to continue to post sublime 2021 earnings performance, mainly driven by YKA in China,” adds Simadputra, who expects the group to ride on China’s growing food industry.
Other stocks that DBS has recommended “buy” within the consumer staples sector include Bumitama Agri, Delfi, First Resources, Japfa and Thai Beverage.
Photo: The Edge Singapore/ Albert Chua
