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RHB upgrades Sheng Siong to 'buy' on spiked demand from tightened restrictions

Felicia Tan
Felicia Tan • 3 min read
RHB upgrades Sheng Siong to 'buy' on spiked demand from tightened restrictions
RHB analyst Jarick Seet has also upped Sheng Siong’s PATMI for the FY2021 by 14.5%.
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RHB Group Research analyst Jarick Seet has upgraded Sheng Siong to “trading buy” from “neutral” previously with a higher target price of $1.95 from $1.70.

The new target price is based on 23 times FY2021 price-to-earnings (P/E).

The upgrade comes as the multi-ministry taskforce announced the further tightening of community measures on May 14.

See: Singapore tightens community measures further as Covid cases spike, WFH to be default

The new restrictions include the prohibition of dine-in activities, indoor mask-off activities and work-from-home (WFH) arrangements. Social gatherings are also limited to two persons, down from the previous limit of five.

On May 16, the multi-ministry taskforce mandated that all primary and secondary schools, as well as junior colleges, will be moved to home-based learning from May 19 till May 28.

See also: Primary, secondary and JC schools in Singapore to move to Home-Based Learning from 19 May: MOE

The moves, says Seet, should result in a “pick-up” in grocery shopping activities, which will benefit Sheng Siong.

As such, Seet has also upped Sheng Siong’s PATMI for the FY2021 by 14.5%.

“Trading buy”, however, refers to the temporary restrictions, which should be lifted if the spread of Covid-19 community cases are contained.

On May 14, long queues were already forming at supermarkets islandwide, prompting then Minister for Trade and Industry Chan Chun Sing to assure citizens and residents that Singapore’s stockpiles of food and essentials are “more than adequate” in a post that was shared on Chan’s Facebook and Instagram accounts.

Following the tighter restrictions, Seet sees Sheng Siong’s new store openings for 2021 as likely to be delayed due to the slower construction pace and previous delays in building activities.

Since the declaration of DORSCON (which stands for Disease Outbreak Response System Condition) Orange, there has only been one tender made by in November 2020 for two new Housing & Development Board (HDB) shops for use as supermarkets, neither of them won by Sheng Siong.

During the pandemic, Sheng Siong was one of the beneficiaries, booking record sales and profits in FY2020.

For more stories about where the money flows, click here for our Capital section

“Even though the company’s sales remain stellar – vs pre-pandemic levels due to WFH and travel restrictions – we think that this and its profitability should return to normal levels in time, as more and more people get inoculated,” writes Seet in a report dated May 17.

“However, as Singapore has returned to Phase 2, we expect sales to climb again over May-June. If the spread of Covid-19 infections does not taper down, containment measures may be extended,” he adds.

As at 3.46pm, shares in Sheng Siong are trading 3 cents lower or 1.8% down at $1.63, or 6.2 times P/B, according to RHB’s estimates.

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