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Analysts have mixed appetites on Sheng Siong

Samantha Chiew
Samantha Chiew • 6 min read
Analysts have mixed appetites on Sheng Siong
To buy or not to buy Sheng Siong? Photo: Albert Chua/ The Edge Singapore
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Analysts have mixed sentiments on supermarket operator Sheng Siong, following the group’s latest 1QFY2024 ended March results.

To recap, the group reported earnings of $36.3 million, 8.9% higher y-o-y. Revenue for 1QFY2024 increased by 5.5% y-o-y to $376.2 million, while the group’s net profit margin (NPM) increased 0.3 percentage points (ppts) y-o-y to 9.7%.

The higher revenue was mainly driven by an 8.0% y-o-y increase in same store sales, and supported by a longer sales period before the Chinese New Year compared to last year.

The group’s gross profit margin (GPM) for the quarter rose by 0.6 ppts y-o-y to 29.4%.

See more: Sheng Siong earnings up 8.9% y-o-y to $36.3 mil for 1QFY2024

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CGS International is maintaining its “add” recommendation and $1.88 target price, as analysts Ong Khang Chuen and Kenneth Tan sees the group benefitting from a later Lunar New Year this year. “We continue to like Sheng Siong for its strong operational execution and expect reacceleration of EPS growth riding on faster store openings in FY2024,” they say.

The two analysts also see more opportunities for store opening for FY2024. “We forecast four new store openings in Singapore and one addition in China for Sheng Siong in FY2024,” say Ong and Tan, while acknowledging the group’s new store opened in 1QFY2024, as well as a store expansion.

The group also sees opportunity to acquire commercial premises to support its store expansion plan, given its strong net cash position of $352 million as at end-March.

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“FY2024 revenue outlook remains strong, in our view (CGSI estimate: +5%), buoyed by consumers cutting back on non-essential spending and shifting spend towards groceries and fresh food, coupled with supportive government measures, including targeted cash handouts,” say Ong and Tan, as they note that the group has continued to deftly navigate keen competition in Singapore’s supermarket industry.

PhillipCapital has also kept its “accumulate” call and $1.66 target price on Sheng Siong.

Analyst Paul Chew says: “We expect Sheng Siong to continue taking market share from wet markets and peers as the competition from smaller supermarket chains ebbs.”

He expects same-store sales (SSS) growth of 4% in FY2024, while gross margins will creep up at a slower pace.

Chew notes that only two stores were opened last year. The lack of new stores will be a drag on revenue this year. With industry-leading margins, it will be challenging for Sheng Siong to expand further. Supply chain bottlenecks include distribution centres.

Another avenue for growth is acquisitions, as the company has built up a record net cash hoard of $352 million.

In China, the operation remains profitable. Target customers are the heartlands community, but their supermarket concept is different than it is in Singapore. The products are very localised and loose items are commonly sold.

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Competition for the China supermarkets commonly come from wet markets and street hawkers, but supermarkets are preferred due to hygiene and higher food safety compliance. Online delivery is done via picking up goods from the store rather than a centralised model.

“Sheng Siong’s attractive financial metrics include and ROE of 27%, a dividend yield of 4.2% and net cash of $352 million,” says Chew.

Meanwhile, RHB Group Research has maintained its “buy” call on Sheng Siong with a target price of $1.96.

Analyst Alfie Yeo says: “We remain upbeat on Sheng Siong on the back of steady consumption demand and store opening opportunities. We expect tailwinds from strong SSS growth over the Lunar New Year festive period and recently issued Community Development Council (CDC) vouchers to Singaporean households to drive growth.

Yeo expects the group’s outlet opening to also be “robust”. Already the group opened one new store in 1Q2024 and has four other bids pending. The Housing & Development Board (HDB) is expected put up another five stores for tender in the next six months, which offer opportunities for the group to increase its store network this year. The group also plans to open one new outlet in China in 2Q2024.

“We expect Sheng Siong to secure some of these outlets and assume three outlets per annum in our forecast assumption, adding to the 69 stores it has currently,” says Yeo.

Key downside risks to RHB’s EPS estimates include slower-than-expected store openings, lower sales demand and per sq ft traction, and the inability to maintain gross profit margins at current levels. “However, we expect Sheng Siong’s performance to remain resilient as it targets the mass market value segment, which will enjoy effects of downtrading in a soft consumption environment in our view,” says Yeo.

Hold on

DBS Group Research however has a “hold” rating on the stock with a $1.62 target price.

Looking at Singapore Department of Statistics’ supermarket retail sales value data, it grew about +4.4% during Jan-Feb period. Assuming +1% growth in March, in-line with food excluding services inflation, DBS estimates that the market likely expanded about +3.3% in 1Q2024 and the company grew in-line with the overall market based on +3.6% sales growth of established stores.

Of the eight HDB stores up for tender and three awaiting results, DBS is optimistic that the company should be able to secure at least four stores given seemingly muted bidding environment. “We believe new store contribution will likely be materially reflected in terms of earnings towards late FY2026/FY2027 given estimated two years breakeven time frame. With utility cost likely to stay at elevated level on high miscellaneous charges, we see earnings growth largely driven by continued gross margin expansion,” says DBS.

Sell off

Citi Research has reiterated its “sell” call on Sheng Siong with a target price of $1.43.

Despite growth in the latest earnings, analysts Luis Hilado and Chong Zhou note that gross floor area (GFA) quality remains a key concern. On top of this, other concerns the analysts highlighted include challenging SSS growth, tapering margin improvements and elevated administrative expense.

In 1QFY2024, the group opened two stores, but management viewed one of the new store in Bukit Batok as an extension of an existing store. Sheng Siong will be attempting to run the neighbouring stores as a “single store” under the same management team via better product placement to prevent sale cannibalisation.

“As the effectiveness of the ‘single store’ concept is unproven, we maintain our cautious view (note that SSS increased by 8.0% y-o-y while revenue only increased by 5.5% y-o-y seems to indicate limited new store revenue growth),” write the analysts in their April 26 report.

With six remaining tenders (three pending outcomes, lost one to NTUC) and two additional re-leasing tenders, the analysts believe that Sheng Siong is well-positioned to reach its target of opening at least three new stores annually.

Meanwhile, the analysts note that the dining-in trend is expected to reverse in 2024. “With March 2024 core CPI slowed more than expected to 3.1% y-o-y, we believe inflation easing is more of a timing issue in 2024 and will eventually lead to the reverse of dining-in trend,” say the analysts, adding that this, along with the discontinuation of GST absorption will result in a moderate revenue growth.

As at 2.50pm, shares in Sheng Siong are trading 1.3% higher at $1.55.

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