CFA Society Singapore
SINGAPORE (Nov 1): Sheng Siong recently announced that its 3Q18 earnings have dropped by 9.4% to $17.8 million, compared to $19.7 million in 3Q17.
This was mainly due to the absence of $2.2 million worth of tax refund a year ago. Excluding this, the group’s net profit would have increased by 1.5% in 3Q18.
Revenue during the quarter came in at $227.9 million, 8.9% higher than $210.9 million last year.
Despite a drop in overall earnings, DBS Group Research is reiterating its “buy” call on Sheng Siong with a target price of $1.24.
In a Wednesday report, lead analyst Alfie Yeo says, “We maintain ‘buy’ for Sheng Siong as we continue to see growth driven by more new stores after opening eight new stores since 4Q17, improving efficiencies and margins from better sales mix, and warehouse expansion due to kick in from FY19F.”
In addition, the analyst believes that near term outlook for HDB supermarkets remain robust, with five outlets up for tender in the next six months.
On the other hand, Yeo does not see Amazon’s entry as a serious threat to Sheng Siong as the supermarket’s target customers are less of the millennials who are receptive to online grocery shopping.
Similarly, RHB Research is reiterating its “buy” recommendation on Sheng Siong with a target price of $1.27, for its defensive nature and potential to generate earnings growth amidst weakening consumer sentiment next year. Sheng Siong is also RHB’s top pick for the consumer sector.
In a Thursday report, analyst Juliana Cai says Sheng Siong’s high administrative costs dampened earnings growth in 9M18.
Moving into 4Q18, the group has three more new stores in the pipeline.
"As such, we expect administrative expenses to remain high," says Cai, "However, as a percentage of revenue, we expect administrative expenses to taper off over FY19, as the three stores opened in 2017 should reach breakeven levels and revenue of new stores matures.”
Cai expects the group’s same store sales growth (SSSG) to remain muted for FY19, with new stores being the key driver for sales growth.
“In this respect, we are positive on its FY19 performance, as the 10 stores opened this year will be in their ramping-up phase, and should contribute positively to earnings growth,” says the analyst.
Given the group’s distribution centre is likely to be completed next year, Cai believes that this will be crucial for the group in raising overall efficiencies and widening its gross profit margin.
In addition, the group continues to drive its sales mix to focus more on fresh produce to enhance gross margins. The increase in store count also allows it to push for higher suppliers’ rebates.
As at 11.40am, shares in Sheng Siong are trading at $1.07 or 5.3 times FY19 book, with a dividend yield of 3.8%.