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Analysts positive on Sheng Siong in light of healthy margins for 3QFY2022

Chloe Lim
Chloe Lim10/31/2022 12:43 PM GMT+08  • 6 min read
Analysts positive on Sheng Siong in light of healthy margins for 3QFY2022
One of Sheng Siong's branches. Photo: Albert Chua/The Edge Singapore
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Analysts on the whole are positive on Sheng Siong, considering how the group’s 3QFY2022 ended September results exceeded expectations, with the quarter's revenue and patmi at $333.5 million and $32.8 million respectively.

PhillipCapital Research analyst Paul Chew has kept a “buy” rating on Sheng Siong with an unchanged target price of $1.86.

Chew shares that Sheng Siong’s revenue and patmi for 3QFY2022 beat expectations, coming in at 78% and 82% respectively of his FY2022 forecast.

The analyst attributes these positive results to the higher contribution from the sale of fresh food in recent times boosting margins. “The ability to manage fresh food effectively from direct sourcing to the processing of meat and seafood in the stores gives Sheng Siong an edge over their peers, in our opinion,” Chew writes.

In addition, due to recent inflation levels affecting the cost of food and raw materials, Chew notes that more and more consumers are more inclined to choose Sheng Siong’s products over that of other house brands that tend to be more expensive.

Sheng Siong also added a new 10,000 sq ft store in Margaret Drive recently, following the closure of a 5,000 sq ft store in Yishun. This increased their store footprint in 3QFY2022 by 5.5% y-o-y.

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A new 6,000 sq ft store in Senja Valley will also be added in 4QFY2022, which stands to increase the total sq ft in FY2022 by 5% to 608,000 sq ft.

Expectations are for three to five new stores per annum over the next five years, writes the analyst.

“We lift FY2022 earnings by 5% to $127.8 million, where the increase in goods and services tax (GST) from January 1, 2023 could also pull some sales into 4QFY2022,” says Chew.

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However, Chew also observes that Sheng Siong’s 3QFY2022 same-store sales are down 7.2% y-o-y, down for the second consecutive quarter and accelerating from the 2QFY2022 5% decline.

“We expect weakness in revenue for Sheng Siong until 1HFY2023, as the relaxation of border controls, return to office and removal of dining restrictions will be a drag on sales as home dining declines,” explains Chew. “Our expectations are for growth to resume in 2HFY2023 from the expansion of its store footprint.”

Overall, Chew sees Sheng Siong as “attractive” thanks to its metrics that includes a return on equity of 30%, dividend yield of 4% and net cast of $228 million as at end September.

CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have kept an “add” rating on Sheng Siong with an unchanged target price of $1.85.

The analysts expect the group’s gross profit margin (GPM) to remain stable at 29.5% in FY2023, as Sheng Siong has appeared to be able to keep up with pricing campaigns of competitors thus far.

Ong and Tan also note that Sheng Siong has fared positively with its continued strategy of increasing its sales mix from higher margin categories such as fresh food and private labels.

For 3QFY2022, Sheng Siong notes that contribution from private label sales rose to approximately 7% as compared to 6% in FY2021.

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“We view Sheng Siong as a defensive play amid the current backdrop of rising inflation and potential economic slowdown,” write the analysts. “We fine-tune our FY2022-FY2024 earnings per share (EPS) forecasts, and keep our target price at $1.85, still based on 21x calendar year (CY) 2023 P/E (10-year historical mean).”

Meanwhile, Citi Research analyst Jame Osman has also kept a “buy” rating on Sheng Siong with an unchanged target price of $1.79, as the group’s revenue was in line with expectations, while net profit came in ahead due to a stronger-than-expected margin performance.

Osman views the positive 3QFY2022 results as a “continuation of trends” from the previous quarter, driven by an anticipated normalisation in store productivity, following the relaxation of Covid-19 safety measures.

Meanwhile, Osman notes how Sheng Siong’s gross margin performance continued to be a “bright spot.” “Despite our expectations for operational deleveraging with a decline in store productivity, we believe solid cost control as well as efforts to improve its fresh sales mix have been key drivers for margin improvement,” writes the analyst.

To that end, Osman notes that with the opening of two new stores in 1HFY2022 and another one store in 3QFY2022, Sheng Siong’s total store base in Singapore has reached 66, compared to 64 in FY2021. This is in line with the management’s target to open three to five new stores over the next three to five years, particularly in areas of Singapore where it does not have an existing presence.

“Ahead, we expect the resumption of construction activities could accelerate the tender process for commercial shop space in public residential areas where Sheng Siong targets to expand its store network,” says Osman. Already, Sheng Siong sees a potential pipeline for 13 store tenders over the next one and half years from HDB.

“In a recessionary environment, as observed in previous cycles, Sheng Siong could also opportunistically turn to store openings in the private market, particularly if lease rate declines to an attractive level, or less efficiently run supermarket peers close stores,” adds Osman.

At the same time, management has also mentioned that it is sourcing for a suitable site for its new central distribution centre, which will be able to support its next stage of growth over the longer-term and be able to potentially handle the capacity for a store network of over 100 stores.

Management intends to invest in more efficient distribution and logistic capabilities also by improving automation and reducing manpower reliance, where it estimates that approximately 20% of its product range can be better managed through dedicated equipment.

The analyst notes that previously, the company’s premises at Mandai developed at a cost of $65 million had also been a key driver of margin expansion through various cost initiatives including direct sourcing and bulk handling.

“We currently forecast a 1.8 percentage points (ppt)% improvement in gross margin from FY2022 to FY2024, which we expect to be driven by a sustained improvement in proportion of fresh and house-brand sales mix, as well as solid cost control,” writes Osman, while noting that shoppers are turning more cost conscious due to current inflationary pressures, which has resulted in an uptick in demand for its house brand products..

Overall, the analyst continues to be optimistic that Sheng Siong is well-positioned to outperform with its defensive business, solid earnings visibility as well as opportunities for further growth ahead, particularly in the climate of looming near-term recession risks.

As at 12.40pm, shares in Sheng Siong are trading at 1 cent down or 0.64% lower at $1.55 at a FY2022 P/B ratio of 5.2x and dividend yield of 4% according to PhillipCapital’s estimates.

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