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Sheng Siong continues to be a household staple

Samantha Chiew
Samantha Chiew11/2/2020 12:13 PM GMT+08  • 6 min read
Sheng Siong continues to be a household staple
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Analysts are positive on supermarket operator Sheng Siong, as grocery demand has shown to be resilient despite the relaxing of social distancing measures, as many are still working from home.

This is evident in Sheng Siong’s latest 3QFY2020 business update, which saw earnings surge some 54.4% y-o-y to $31.8 million, translating to earnings per share (EPS) of 2.11 cents, higher than 1.37 cents in 3QFY2019.

Revenue for the period increased by 28.9% y-o-y to $327.3 million, contributed by comparable same store sales and new stores in Singapore that came about from elevated demand due to the Covid-19 pandemic, and a rise in sales from the group’s stores in China.

See: Sheng Siong reports 54.4% surge in 3Q earnings to $31.8 mil on elevated demand arising from Covid-19

On the back of this, CGS-CIMB is keeping its “add” call on the stock with a lower target price of $1.88 from $1.95 previously.

In an Oct 30 report, analyst Cezzane See says, “We lift FY2020 EPS by 6.2% on higher revenues and other income. We trim FY2021 EPS on slightly lower sales psf as we think same-store-sales growth may gradually fall as the country emerges from the Covid-19 pandemic. This results in our FY2021 EPS declining 16.8% y-o-y. We keep our FY2022 EPS relatively unchanged.”

See has a core EPS prediction of 8.7 cents per share for FY2020, 7.2 cents for FY2021 and 7.5 cents for FY2022.

Meanwhile, she has a FY2020 P/E estimate of 19.01 times, which is close to 2.5 times standard deviation above the group’s long-term mean as she still thinks it deserves to trade at a premium over peers and historical average due to its strong balance sheet (net cash of 12 cents/share) that makes it a defensive pick.

DBS Group Research shares similar positive sentiments as it continues to rate Sheng Siong a “buy” with a target price of $1.90.

In an Oct 30 report, lead analyst Alfie Yeo says, “Sheng Siong is a direct beneficiary of Covid-19, with close to full exposure to consumers staying home and social distancing. Long term earnings growth is driven by improving market share at the expense of wet markets.”

“We expect FY2021 earnings to remain robust, driven by higher store count and better gross margins. We see Singapore proceeding cautiously into Circuit Breaker Phase 3, with consumers continuing to stay home, supporting supermarket sales going forward,” he adds.

Yeo likes the stock for its defensive earnings, strong balance sheet, cashflow generation capabilities and strong exposure to Singapore’s supermarket consumption. He also believes that there is still upside to the stock’s valuations as it is currently trading at 20-23 times forward earnings, valuations are well below his target of 25 times, which is 2 SD of its historical forward P/E range.

On the other hand, Phillip Capital is remaining “neutral” on Sheng Siong with a target price of $1.71.

In a Nov 2 report, analyst Paul Chew says, “With more time being spent at home, household cooking and eating should remain elevated, supporting grocery retailing. Sheng Siong’s positioning as an affordable and modern fresh-food store for the younger generation should enable it to take more wallet share from wet markets.”

On the outlook, Chew admits that it is challenging to “fathom normalising supermarket sales”, come FY2021. Household sales are likely to still remain elevated with more people staying at home due to work-from-home arrangements and the continued border closure.

Meanwhile, consumers are also embracing e-commerce, with the industry’s market share doubling to around 10% in 2020. Although management understands the value of this channel, efficiency, scale and high logistics or platform costs are still major barriers to profitability in grocery e-commerce.

Covid-19 has also delayed the group’s opportunity to open up new stores as the Housing Development Board (HDB) is temporarily freezing the award of new heartland stores. Tenders should resume in 2021 when new HDB BTO units are completed.

Like PhillipCapital, KGI has also maintained its "neutral" call on Sheng Siong with a target price of $1.58 as it expects the group to fall off its growth trajectory due to the Covid-19 tender freeze.

"In July and August consecutively, we have observed supermarket sales trending downwards, and believe that while it will not return to pre-Covid levels in the near term, supermarket sales will continue to taper as Singapore enters Phase 3 of its reopening, and as more return to the office and spend less time cooking at home," says analyst Amirah Yusoff.

3QFY2020 saw a much slower pace of growth compared to that of 2QFY2020, which is in line with the brokerage's expectations given the easing restrictions on dining out.

"Performance for FY2020 is expected to be a one-off event but we expect growth to revert to pre-Covid levels once restrictions are eased further and Singaporeans begin to spend less time at home," she adds.

Similarly, UOB Kay Hian has downgraded Sheng Siong Group to “hold” from “buy”.

Despite the group’s stellar performance in 3QFY2020, analysts Joohijit Kaur and John Cheong foresee the trend to continue into 4QFY2020 but taper off going into 2021 on the premise of Singapore’s transition into Phase 3 of reopening by end 2020.

“Demand should moderate, but at gradual pace going into 2021. Despite the lifting of the circuit breaker, demand for groceries has remained strong in June - August 2020, albeit gradually moderating,” they say.

“Supermarket sales in July and August 2020 rose 28.5% y-o-y and 21.9% y-o-y respectively compared to pre-Covid-19 low single-digit growth. For 2021, we forecast an 11% decline in revenue/psf and lower operating margin to incorporate the moderation in supermarket sales, particularly as Singapore could transition into Phase 3 of reopening,” they add.

“That said, our revenue/psf assumption for 2021 is higher compared to pre-COVID-19 levels as there are likely to be residents who would continue to work from home. Furthermore, a change in consumer behaviours favouring home consumption could also support supermarket sales.”

On that, Kaur and Cheong have raised their net profit forecasts for 2020-2021 by 11.7% and 6.5% respectively to incorporate the supermarket group’s strong earnings this year. The analysts have also lifted their revenue forecasts slightly by 1.9% and 3.9% for 2021 and 2022 respectively on their higher revenue/psf estimates.

“We now expect net profit of $133.5 million (+11.7%), $106.3 million (6.5%) and $110.7 million (+6.4%) for 2020-22 respectively,” they say.

Their lower target price of $1.74 from $1.95 previously is pegged at 24.6x 2021F PE. Kaur and Cheong have also identified Sheng Siong’s entry price at $1.58.

As at 12.12pm, shares in Sheng Siong are trading at $1.65 or 7.1 times FY2020 book with a 3.7% dividend yield.

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