Sheng Siong kept at 'buy' for defensive stance in supermarket space

Sheng Siong kept at 'buy' for defensive stance in supermarket space

Samantha Chiew
27/02/19, 12:20 pm

SINGAPORE (Feb 27): Sheng Siong is a “buy” for most research houses.

Sheng Siong on Monday announced that its FY18 earnings increased by 1.4% y-o-y to $70.8 million, on the back of a 7.4% increase in FY18 revenue to $890.0 million

For 4Q18, earnings increased by 4.2% to $27.5 million, while revenue saw a 10.7% increase to $221.8 million, due largely to contributions from new stores.

See: Sheng Siong posts 1.4% increase in FY18 earnings to $70.8 mil; declares final dividend of 1.75 cents

RHB Research is keeping its “buy” call on Sheng Siong with a target price of $1.25. The stock is also one of RHB’s top picks in in the country and a top consumer sector pick.

Although the group’s results were in line with expectations, RHB has lowered its FY19-20 earnings by 3-4%, as a results of weaker same store sales growth (SSSG) trend, as well as the change in accounting standards, which would front load rental expenses in the earlier years of the leases.

SSSG forecast for FY19 was also lowered due to slowing GDP growth and intensifying competition from the proliferation of brick and mortar supermarkets in Singapore.

Nonetheless, RHB remains positive on FY19-20 performance, as 10 of Sheng Siong’s new stores that opened in 2018 would be in ramp-up phase over the next two years.

In a Wednesday report, analyst Juliana Cai says, “We expect most of these new stores to turn profitable as sales mature this year. This, together with gross margin expansion, could drive earnings growth for the next two years. We also forecast the group to secure three new stores in FY19.”

OCBC Investment Research has upgraded its recommendation on Sheng Siong to “buy” from “hold” with an increased fair value estimate of $1.19 from $1.13 previously.

SSSG decreased by 0.4 percentage points (ppt) y-o-y to 1.7% in FY18, while SSSG for 4Q18 dropped to -2.7% from 3.2%.

The group’s management highlighted that retail sales for supermarkets was challenging in 2H18 and that certain HDB stores faced stiff competition from other brick-and-mortar stores in the vicinity.

In a Wednesday report, analyst Deborah Ong says, “Going forward, we are still wary that consumer spending could see some softness in 1Q19.”

“That said, we still do expect top-line and operating margins to grow in 2019, as the 10 new stores that opened last year are given more time to stabilise,” adds Ong.

DBS Group Research is maintaining its “buy” recommendation on Sheng Siong with a target price of $1.25.

The group’s growth will be led by new stores and cost efficiencies. Improving efficiencies and margins from better sales mix, and warehouse expansion to kick in from FY19F will also support better margins.

Currently, Sheng Siong’s growth strategy is to open new outlets in areas that it has no presence.

In a Tuesday report, analyst Alfie Yeo says, “The near-term outlook for new supermarket supply in HDB estates looks good with five outlets up for tender in the next six months.”

For now, the analyst does not see online grocery retail as a serious threat to Sheng Siong as the group’s target customers are less of the millennials who are open to online grocery shopping; warehouses of online grocery retailers are smaller; the online market is currently small and will take time to gain share from brick-and-mortar stores rather than ramp up rapidly.

“We believe that Sheng Siong with its decent store network and logistics chain could be a takeover target for online players eventually,” says Yeo.

Similarly, CGS-CIMB Research continues to rate Sheng Siong a buy, although with a lower target price of $1.22 from $1.25 previously.

The group’s Fy19 revenue will see the impact of the 10 new stores that opened in 2018, which could counterweigh the potentially weak same-stores sales rate in FY19F (on account of slower macro growth).

Meanwhile, a second China store lease was signed and could be operational in 3Q19. But compared to the group’s Singapore operations, China remains in the early stages.

In a Tuesday report, analyst Cezzane See says, “We cut our FY19-20 net profit forecasts marginally on lower revenue per square feet in light of the uninspiring retail index growth and slightly higher SG&A costs in FY19. But we still like Sheng Siong for its defensive stance in the supermarket space, strong GPMs and healthy balance sheet.”

As at 12.20pm, shares in Sheng Siong are trading at $1.09 or 5.2 times FY19 book with a dividend yield of 3.5%.

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