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Sheng Siong stays defensive amid rising inflation and GST hike, analysts maintain 'buy'

Khairani Afifi Noordin
Khairani Afifi Noordin1/26/2023 10:49 AM GMT+08  • 3 min read
Sheng Siong stays defensive amid rising inflation and GST hike, analysts maintain 'buy'
Sheng Siong had shown sustainable growth in its gross margin over the years, proving its ability to pass rising costs. Photo: Albert Chua/The Edge Singapore
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UOB Kay Hian analysts John Cheong and Heidi Mo have kept “buy” on supermarket operator Sheng Siong Group with a target price of $1.91, expecting the company to stay defensive amid rising inflation and goods and services tax (GST) hike.

In their report, the analysts point out that Sheng Siong is poised to continue enjoying steady demand that comes with changing consumer dining habits.

In a bid to cushion the blow of the newly-introduced GST rate hike from 7% to 8%, Sheng Siong has launched a “counter-inflation discount until March 31, where shoppers can get most in-store products at 1% off. Coupled with sustained inflationary pressures, consumers are likely to cut back on dining out and eat more meals at home.

This hike is only the first of the two planned increases — the GST rate is set to hike further to 9% on Jan 1, 2024. Sheng Siong should continue to enjoy healthy demand for groceries with its competitive pricing moving forward, the analysts say.

Sheng Siong had also shown sustainable growth in its gross margin over the years, proving its ability to pass rising costs onto customers, Cheong and Mo highlight. Aside from the defensive nature of consumer staples enabling it to raise prices without losing consumers, the demand for higher margin fresh products should also continue to grow, as these are essential ingredients for cooking.

Therefore, the analysts expect rising costs and Sheng Siong’s ability to maintain gross margin to translate into higher earnings in the future. “To recap, Sheng Siong’s 9MFY2022 gross profit margin improved by 9 percentage points y-o-y to 29.4% due to favourable sales mix,” they add.

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Meanwhile, RHB Group Research analyst Alfie Yeo highlights that Sheng Siong is still driving its gross profit margin expansion, having expanded it to 30% in 3QFY2022 from 26% in 2017. Aside from tilting its sales mix towards fresh products, the growth was also supported by directly purchasing from sources and growing its house brands. The analyst expects Sheng Siong to book slightly wider gross profit margins moving into FY2023-FY2024.

RHB has trimmed its FY2023-FY2024 earnings estimates by 5% each to reflect further post-lockdown economic reopening and normalisation of supermarket sales going forward. Yeo has kept a “buy” call on Sheng Siong with a target price of $1.76.

During 9MFY2022, Sheng Siong opened four new stores in Singapore, bringing its total store count to 67. As the supply of new HDB commercial space is expected to increase, the company expects to continue achieving its annual target of three to five store openings per year.

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Yeo points out that there are four new supermarkets — with a floor area of 5,000 to 6,000 sq ft each at Punggol, Yishun, Clementi and Toa Payoh that are up for tender in the next six months. He conservatively forecast the addition of two new Sheng Siong outlets each year in FY2023 and FY2024 respectively.

As at 10.46am, shares in Sheng Siong are up 1 cents or 0.6% at $1.66.

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