SINGAPORE (Oct 27): RHB Research believes supermarket chain Sheng Siong Group needs to turn to new store openings and same-store sales growth (SSSG) to make up for the end of its gross profit margin (GPM) expansion.

“We believe the efficiencies derived from the distribution centre have peaked and GPM would remain fairly stable around the current level from here on,” says RHB analyst Juliana Cai in a report on Friday.

“As such, any future growth in earnings would be dependent on sales growth and potential operating leverage,” she says.

In view of an expected slower growth outlook, RHB is keeping its “neutral” rating on Sheng Siong and lowering its target price to 98 cents, from $1.05 previously.

Cai’s cautious call comes despite Sheng Siong on Thursday posting a 25.7% increase in earnings to $19.7 million for 3Q17 ended September, from $15.7 million a year ago.

Excluding a one-off tax refund, the supermarket chain would still have recorded a profit of $17.4 million, which is 11.2% higher than a year ago.

The higher earnings came on back of an increase in revenue to $210.9 million for 3Q17, from $202.4 million a year ago.

See: Sheng Siong posts 25.7% increase in 3Q earnings to $19.7 mil

“We believe Sheng Siong has continued to grow its market share last quarter. 3Q17 demonstrated revenue growth of 4.2%, which is stronger than industry average of 3.2% across July and August,” says Cai, attributing it to contribution by new stores and positive SSSG.

She notes that Sheng Siong won another three bids for HDB retail sites during the last quarter, and estimates that the chain would secure another four out of the 10 supermarkets sites that will be put up for bidding by HDB over the next six months.

“Revenue per store, however, should decline moving forward as a result of cannibalisation amongst the stores,” Cai warns. “We think Sheng Siong’s reliance on Singapore market is likely to limit its growth in the long run.”

As at 11.58am, shares of Sheng Siong are trading 1 cent higher at 94 cents, implying an estimated recurring price-to-earnings ratio of 20.4 times and dividend yield of 3.5% for FY17.