SINGAPORE (Feb 24): Phillip Capital is maintaining its “accumulate” recommendation on supermarket operator Sheng Siong with a higher target price of $1.41, from $1.32 previously.

This came on the back of the group recording a 7% y-o-y rise in FY19 earnings to $75.7 million. But for the 4Q19 period, earnings were dipped slightly by 0.8% y-o-y to $17.4 million.

See: Sheng Siong posts 7% rise in FY19 earnings to $75.7 mil despite 4Q dip

Revenue for 4QFY19 rose 11.8% to $247.9 million, led by contribution from new stores, which met the research house’s estimates, but Patmi missed estimates due to higher operating expenses and taxes.

After four consecutive quarters of decline, organic growth or same-store growth (SSG) ii 4Q19 rose 1.8% y-o-y.

In a Monday report, analyst Paul Chew says, “We observe a similar improvement in supermarket industry sales which returned to positive growth of 1.3% in 3Q19 after four quarters of decline since 3Q18. Consumer sentiment has been recovering.”

Gross margins have also been consistent at about 27% for the past three quarters, driven by higher sales of fresh products. But elevated pork prices due to the recent swine flu outbreak capped further upside in margins.

“Moving forward we expect only marginal improvements in gross margins,” adds Chew.

Nonetheless, there are several growth drivers intact for Sheng Siong in FY20, such as store expansion, operating leverage, rebound in revenue per square feet and recovery in consumer sentiment.

Supply chain has been muted due to the coronavirus (Covid-19) outbreak.

Although there is a shortage in personal hygiene products, the supply of other products are stable. Geographical diversification of products sourced should help keep supply stable.

After the Singapore government changed the Disease Outbreak Response System Condition (DORSCON) level to ‘Orange’, consumers have been on a buying spree and hoarding groceries in preparation to avoid public areas.

“The recent ‘spike’ in purchases will be positive for 1Q20,” says Chew.

Meanwhile, the group could also see more benefits from the Covid-19 support package announced in the 2020 Budget. “Sheng Siong could benefit from the recent amendments to the 2020 budget, which includes more than $1 million in benefits through the 8% wage subsidy and half month HDB rental rebate,” adds Chew.

Another attractive point about this counter is its 2.7% dividend yield, 5% ROE and $76 million net cash balance sheet.

As at 12.15pm, shares in Sheng Siong are trading at $1.30 or 5.7 times FY20 book.