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Extraordinary circumstances push Sheng Siong to reach extraordinary results

Samantha Chiew
Samantha Chiew8/3/2020 11:49 AM GMT+08  • 6 min read
Extraordinary circumstances push Sheng Siong to reach extraordinary results
Panic buying during the circuit breaker caused Sheng Siong to record extraordinary results, but can this momentum last?
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The Covid-19 pandemic is an extraordinary worldwide situation that has caused many companies to fall victim to the effects of the highly infectious virus. But there are those who have benefitted from the likes of the pandemic as countries go into lockdown and only essential businesses are kept open.

One such essential business is the supermarket, which also saw several shoppers go into “panic buying” mode and hoarding essential products. This has caused local supermarket operator Sheng Siong to reach a record high in its latest earnings, while the stock is also trading at a record high.

In its latest 2Q20 earnings released on July 29, earnings reached an all-time high of $46.1 million, a 150.7% surge from $28.4 million a year ago, with revenue soaring some 75.8% y-o-y to $418.7 million.

The board has also declared a record high interim dividend of 3.5 cents per share, double that of 1.75 cents declared in the same period a year ago.

See: Panic buying causes Sheng Siong's 2Q earnings to hit record high of $46.1 mil; declares 3.5 cents dividend

However, with the spread of Covid-19 slowly being contained in Singapore and people are not forced to be confined at home anymore, will this momentum last?

Some analysts are still positive on Sheng Siong’s future prospects.

RHB Group Research is keeping its “buy” recommendation on Sheng Siong with a new target price of $1.87 from $1.72 previously.

In an Aug 3 report, analyst Juliana Cai notes that the exceptional earnings were due to the circuit breaker and this will not last for long.

“We also expect sales growth to taper down, as Singapore moved into the second phase of reopening the economy. Nonetheless, the stock is likely to remain a favourite amongst investors, due to its resilient earnings and strong cash flow,” says Cai.

In view of the second wave of Covid-19 infections seen in other countries, Singapore is expected to take a cautious stance – with some of the work-from-home practises persisting into FY21. Hence, the demand for groceries are expected to remain elevated compared to FY19 or pre-Covid days.

“That said, we believe it is unlikely for the group to replicate the stellar sales growth booked in 2Q20, due to the unlikelihood of another lockdown being implemented. We expect sales growth to moderate to 20-25% y-o-y in 2H20 – as consumers slowly switch back to dining out with the reopening of the economy, and on the stabilising number of Covid-19 cases in Singapore,” adds Cai.

On the back of that, FY21 sales growth is forecasted to dip slightly to 7% y-o-y, as new store openings (five new outlets in FY20, and four in FY21) should buffer against the effect of consumers no longer panic buying, and post-lockdown demand, while net margin is forecasted to narrow to 8.6% from 9.5% in FY20 as promotional activities resume, absence of grants and decrease in operating leverage.

DBS Group Research is also maintaining its “buy” call on Sheng Siong with a higher $1.91 target price compared to $1.66 previously.

In a July 30 report, lead analyst Alfie Yeo says, “The full impact of the circuit breaker is reflected in this set of 2Q20 results. We have assumed a reasonable tapering of earnings in 2H20, followed by some moderation of sales in FY21.”

As the Circuit Breaker restrictions ease, those cautious will continue to stay home, supporting sales going forward post circuit breaker. Nonetheless, FY21 earnings forecast have been raised due to a higher store count and better gross margins.

“We believe that Sheng Siong, with its strong store network and logistics chain, could be a takeover target for online players eventually. Online players such as Alibaba’s Hema and Amazon (Wholefoods) are taking the online-to-offline route and operating physical stores,” says Yeo.

Overall, the analyst likes Sheng Siong as it is a direct beneficiary of Singapore supermarket sales in addition to its defensive qualities of strong balance sheet and cashflow generation capabilities.

Sharing similar sentiments, CGS-CIMB continues to rate Sheng Siong “add” with a higher target price of $1.95 from $1.65 previously.

In a July 30 report, analyst Cezzane See believes that Sheng Siong’s same-stores sales peaked in 1H20 but could stay elevated in 2H20 at least as long as Covid-19 prevails. This is because in reference to the research house’s consumer survey conducted in May, 47.9% of the Singapore respondents enjoyed their work-from-home (WFH) experience, with 52% of Singapore respondents preferring to keep the WFH option post-circuit breaker and Covid-19; implying that the “homebody” trend could be here to stay, at least in the near term.

Meanwhile, in 2Q20, the company drew down $30 million worth of loans from a $50 million three-year term loan, which was extended from a government agency in support of a national programme, despite being in a net cash position.

“We believe Sheng Siong could potentially undertake a large project soon. We maintain our capex forecasts until further guidance,” says See.

While the stock represents close to 3 standard deviation above Sheng Siong’s long-term mean of 26.2 times, the analyst believe defensive plays like Sheng Siong, which is in a net cash position and is still growing its market share, will continue to be favoured, in view of the near-term macro uncertainties

On the other hand, KGI Securities is keeping a “neutral” stance on Sheng Siong with a target price of $1.58 as analyst Amirah Yusoff believes that the exceptional performance for 2Q20 is one-off, and demand is expected to normalise by 2021.

“While we have seen strong demand in 1H20, and may continue to see elevated levels of demand in the third and possibly fourth quarter, we believe that the recent 2Q20 demand is unsustainable and will inevitably normalise going into 2021, and growth will return to being dependent on new store openings,” says Amirah in a July 30 report.

PhillipCapital is also less upbeat on Sheng Siong as it downgrades its call to “neutral” from “accumulate” but with a higher target price of $1.65 from $1.58 previously.

In its Aug 3 report, analyst Paul Chew says, “Our FY20 revenue and earnings are raised 29% to $122 million. Revenue and margins triggered by the pandemic were higher than expected. We also incorporated the grants from the government. We expect sales to remain vibrant in 2H20 due to households dining more at home and convenience of Sheng Siong stores compared to peers.”

The pantry loading of essentials in 2Q20 may be over but the surfeit demand should sustain due to more in-home dining by households.

On gross margins, Chew expects this to normalise to around 27% levels as promotions return. He also sees shopper traffic to be supported for Sheng Siong’s HDB outlets as they are located close to neighbourhood centres.

As at 11.50am, shares in Sheng Siong are trading at $1.71 or 7.3 times FY20 book with a dividend yield of 3.5%, according to RHB's estimates.

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