RHB Group Research is reiterating its “buy” recommendation on supermarket operator Sheng Siong with an unchanged target price of $1.87. Sheng Siong is also its preferred pick for retail staple food stocks.

Although Singapore’s Covid-19 situation has stabilised, analyst Juliana Cai continues to like this defensive stock, as she believes supermarket sales could remain elevated in FY2021, as long as the work-from-home (WFH) trend and travel restrictions stay in place.

Supermarket retail sales in Singapore have stabilised over September to November 2020 – after the initial m-o-m decline from June to August – as Singapore entered into Phase 2 of reopening its economy. But the retail sales for the September to November period was still about 20% higher than pre-pandemic levels.

“Anecdotally, we have seen the number of patrons in malls and food & beverage outlets recovering significantly, compared to the start of Phase 2 of Singapore’s reopening of the economy. As such, we believe supermarket’s sales dilution from the rise of on-premise dining has stabilised. This, together with the steady supermarket sales from September to November 2020, could mean that the current run rate (20% from pre-Covid-19 levels) could be the new normal – as long as the WFH trend and travel restrictions are here to stay,” says Cai.

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Meanwhile, Sheng Siong has opened up five new stores in 9M2020. The maturing of these stores should help to mitigate the FY2021 y-o-y decline in sales, in the absence of a lockdown. Sheng Siong typically opens three to five new outlets each year.

“We believe the prospects for new store openings is positive – as we expect more Housing & Development Board sites for supermarkets to be opened for tender in 2H2021, as the construction backlog stemming from delays 2020 clears up,” adds Cai.

Currently, the analyst prefers Sheng Siong to Dairy Farm on the back of its greater exposure to Singapore’s domestic market, which is still recording robust supermarket sales.

“The recovery of Dairy Farm’s health & beauty and restaurant segments might take a longer time, with Hong Kong’s new wave of Covid-19 infections. As such we expect Sheng Siong to continue to trade at a premium to Dairy Farm,” says Cai.

Over the near term,  Sheng Siong’s huge cash pile also raises the potential for special dividends. Any potential privatisation or a collaboration with giant e-commerce players could be a key re-rating catalyst in the longer run.

As at 10.30am, shares in Sheng Siong are trading at $1.58 or 6.7 times FY2020 book with a dividend yield of 3.8%.