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Worsening virus outbreak a reason to cash in on these two supermarket stocks: DBS

Uma Devi
Uma Devi • 4 min read
Worsening virus outbreak a reason to cash in on these two supermarket stocks: DBS
These two stocks are poised to thrive as supermarket sales rise with more customers are either forced to spend time at home, or engage in panic-buying.
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SINGAPORE (Mar 25): With the escalating Covid-19 outbreak and more social distancing restrictions in place, there is good reason to believe that grocery retail stocks are rare beneficiaries of the situation.

Analysts at DBS Group Research believe that supermarket sales will continue to rise as customers are forced to spend more time at home. In fact, random instances of panic buying are also likely to emerge, which will further bolster these stocks.

In a Wednesday report, DBS analyst Alfie Yeo believes that Dairy Farm International (DFI) is one stock to watch. With its share price having plunged some 22% since Mar 6, Yeo attests that the counter is now not only “attractively valued”, but also has a dividend yield of more than 5% with a low risk of a dividend per share (DPS) cut.

“Given that earnings would be supported by brisk sales during the Covid-19 outbreak, we believe downside for the stock is limited,” says Yeo. “A prolonged outbreak would continue to sustain demand for food and healthcare products as well,” he adds.

As retailers around the world fall prey to supply chain disruptions, Yeo argues that DFI could well be a rare exception as its suppliers have varied procurement sources and are flexible enough to switch products or sources when required.

To be sure, the group’s appointment of a new CEO had marked the beginning of a revamp.

“Following the appointment of new CEO Ian McLeod in 2HFY2017, DFI’s management strategy includes building up its management capability, growth in China, maintaining a strong position in Hong Kong, revitalising Southeast Asia, and driving digital innovation,” says Yeo, adding that the group has already shuttered several underperforming and loss-making supermarket and hypermarket stores, mainly in Malaysia, Singapore and Indonesia.

“We expect store performance to improve especially in Southeast Asia, as the new CEO implements plans including product range expansion, space management, pricing strategy, consolidated sourcing,” shares Yeo.

However, Yeo is choosing to remain fairly cautious on this development for the time being, as these strategies will take time to implement and reap benefits.

The brokerage is raising DFI’s FY2020-FY2021 earnings by 3% each, on the back of expectations that sales are going to be brisk for the group’s supermarket, and health and beauty segments.

The brokerage has also raised its sales per store assumptions to reflect better demand for supermarket and healthcare products, and has increased its associates/JV estimates on the back of better performance and contributions from the group’s Yonghui superstores.

“We believe any share price upside will be driven by earnings recovery over the longer term. Upside risk on the stock is based on DFI’s ability to turn in more efficient operations to drive earnings growth,” says Yeo.

Another stock the brokerage is bullish on is supermarket operator Sheng Siong Group (SSG), and are banking on resilient sales for the group as more people are forced to stay home.

DBS has revised its earnings forecast by 3-11% to factor in a strong performance of the group’s new stores.

Yeo notes that SSG has an 18% slice of the local grocery retail market pie, and is also the second largest mass-market supermarket player behind NTUC Fairprice

“We see Sheng Siong as a key direct beneficiary of supermarket demand in Singapore with almost all its earnings contribution derived domestically in Singapore,” says Yeo.

In addition, Yeo identifies that Sheng Siong is among the few market players who are almost immune to external forces. With some 99% exposure to Singapore and only 1% of operations in China, Yeo says the group is well-placed to deal with the external shocks.

“[SSG is] immune to China from which it receives very little contribution,” says Yeo. “Supermarket retail sales improved during SARS in 2003, and locals seeking to avoid crowds would support supermarket sales,” he adds.

DBS has “buy” calls on both Dairy Farm International and Sheng Siong Group with respective target prices of US$4.70 and $1.45. The brokerage has also identified the duo as its top picks for the sector in light of their defensive plays and resilient demands.

As at 11.19am, shares in Dairy Farm International are trading six cents higher, or 1.52% up, at US$4.02, while shares in Sheng Siong Group are trading flat at $1.10.

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