CFA Society Singapore
SINGAPORE (May 2): UOB and Phillip Capital are downgrading their calls on Sheng Siong Group from their previous “buy” calls to “hold” and “accumulate”, respectively, with target prices of $1.09 and $1.13 after the group’s recent stock price run-up of around 10% over the last two months.
Meanwhile, OCBC and Maybank continues to rate Sheng Siong at “buy” with a fair value and price target of $1.12 and $1.20, respectively.
In a Monday report, UOB lead analyst Nicholas Leow recommends an entry price of 98 cents, and says that his target price, which has been lowered by 1 cent from $1.10 previously, is pegged to peers’ 2018 P/E of 22.5 times.
This comes after making minor tweaks to his earnings estimates to account for the latest two new supermarket wins, which were smaller than his expected size of 8,000 sf per new supermarket.
As such, he has lowered the group’s 2018-20 net profit estimates by 1.2-1%, and continues to highlight the ongoing price war between e-commerce platforms Amazon and Redmart as a potential threat to brick-and-mortar supermarkets such as Sheng Siong.
The analyst nonetheless remains positive on Sheng Siong in view of its positive 1Q18 results, which were in line with UOB’s expectations and reflected improving revenue on the back of improved consumer sentiment.
“Our online channel checks at Place2Lease.com indicate a healthy supply of about nine new supermarket outlets up for bidding over the next six months. This does not include any tenders through the closed bidding channel. Assuming a conservative win rate of 15%, we expect Sheng Siong to win one new shop for 2018, which will bring total supermarket wins for the year to seven,” adds Leow.
Similarly, Phillip Capital’s downgrade on Sheng Siong comes on its recent share price rally despite maintaining an overall positive view on the group’s earnings outlook and margins.
Its target price, which remains unchanged, is based on an estimated 4.92 cents FY18 EPS and 23 times earnings multiple.
“We believe that the group’s free cash flow should improve further from FY19 with no huge ticket capital expenditures in plan. Growing free cash flows could be a prelude to a higher dividend payout in future,” notes Phillip analyst Soh Lin Sin in a separate report on Monday.
While Soh foresees the group’s gross profit margin continuing its expansion over FY18 as well as further upsides from potential new stores in coming quarters, she is also expecting higher staff costs on the absence of new stores in 1Q17.
Regardless, the analyst thinks Sheng Siong’s administrative costs can be contained at below 17% of group revenue considering its solid track record of cost management, in her view.
Looking ahead, OCBC lead analyst Eugene Chua expects Sheng Siong’s 1Q same-store sales growth (SSSG) of 5.6% to sustain well into FY18, driven by the expansion of its Tampines 506 store, along with the spillover of customers from the closure of its stores at The Verge and Woodlands 6A to other neighbouring Sheng Siong outlets – although he expects SSSG to normalise to 2-3% from FY19 onwards.
The analyst has lifted FY18-22 earnings per share (EPS) estimates by 2-5% on in-line 1Q18 results, higher store count and expectations of a stable gross profit margin ahead.
He is also positive on its management’s intentions to continue bidding for new HDB stores in re-developed and new neighbourhoods, with further plans for expansion in HDB estates without existing the group’s outlets.
“We continue to like Sheng Siong for its stability and strong consistent record in operating cash flow generation,” says Chua.
Maybank analyst John Cheong likewise expects the group’s future earnings growth to remain healthy in terms of new store openings, SSSG and an ample expansion pipeline.
Following the conclusion of Sheng Siong’s recent non-deal roadshow (NDR), Cheong notes “impressive new and comparable store sales growth” and expects its positive forces of store expansion, consumer sentiment recovery and increasing gross margin to sustain into 2018.
Specifically, he highlights that fresh products remain a key differentiator for the group to defend against online threats and competitors, and thinks Sheng Siong has a good expansion pipeline as more new stores are now up for tender.
“In addition, we see upside from margin expansion as Sheng Siong increases its sales mix of fresh products, more automation, and completion of its central warehouse expansion, targeted in end-2018. Beyond that, management is seeking to penetrate into new market segments by engaging with the millennial in new housing estates and targets to expand further via 2-3 new stores in Kunming, China, over the next 1-2 years,” says Cheong.
As at 12.42pm, shares in Sheng Siong are trading 1 cent higher at $1.03 or 14 times FY18 book according to UOB estimates.