DBS Group Research is upgrading its call on supermarket operator Sheng Siong to “buy” from “hold” previously with a higher target price of $1.80 from $1.62.
Analysts Chee Zheng Feng and Andy Sim like that the group has an excellent track record of supply chain management and tender bidding. The group has consistently delivered y-o-y gross margin expansion, leveraging its excellent sourcing capabilities to procure products at competitive prices.
In addition, it has also consistently delivered store count growth, having secured 44% of total HDB tenders for the past five years.
“Together, these two factors have ensured the company is able to deliver steady revenue and profitability growth since 2013, except for 2021 due to an abnormal, Covid-led high base,” say the analysts.
To that end, the analysts are expecting Sheng Siong to deliver “above-norm” 8% earnings growth for FY2024, largely on gross margin expansion, lower utility costs, and higher net interest income. Moving into FY2025, they believe the continued gross margin expansion and surge in new store count would more than offset lower net interest income and support the above-consensus 5% bottom-line FY2025 growth rate.
With stabilising operating costs, Chee and Sim believe the next driver of growth will be new stores. Hence, investors should look out for upcoming HDB tender results.
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“Given the current landscape where Giant and Hao Mart are streamlining their footprints, Sheng Siong is uniquely positioned to rapidly expand its network,” say the analysts, while noting that YTD the group has secured four new stores and is bidding for another four. They are optimistic that at least two additional stores could be secured, leaving the group with potentially six new stores secured this year.
“We retained our above-consensus earnings estimates and applied a higher 18x forward PE (previous: 17x), +1 standard deviation of its average four-year forward PE, on its FY2025 earnings,” say the analysts, who believe that the believe the higher valuation peg is justified, given the lower equity risk premium with the falling interest rate and higher probability of a hike in the dividend payout ratio.
Meanwhile, OCBC Investment Research is reiterating its “buy” call and $1.88 fair value estimate on Sheng Siong as the research team is optimistic on the group’s robust new store supply pipeline.
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“We view Sheng Siong as a defensive play amid rising inflation and slower economic growth. We believe demand for groceries will continue to normalise in 2024, but could potentially be supported by a shift in consumption patterns towards a focus on “value for money” due to inflationary pressures and a higher cost of living,” say the research team.
The team also believes that grocery sales could be supported by Singapore Budget 2024’s announcement on inflation offset measures such as the CDC vouchers.
The OCBC research team notes that Sheng Siong has already exceeded its opening target of at least three stores a year, by already opening four stores with plans to bid for seven more stores in 2H2024. In China, Sheng Siong opened one store in June 2024, bringing the total number of stores in China to six.
In the second quarter of the year, the group’s revenue and net profit rose by 1.2% and 4.5% y-o-y to $338.0 million and $33.6 million respectively, in-line with expectations. Gross profit margin also remained resilient at 30.9%, hitting another record high during the quarter, compared to 30.6% in 2QFY2023, as the group continued to optimise its sales mix.
“We continue to view Sheng Siong as a defensive play and expect the store growth to pick up from 2H24, supported by robust new store opening opportunities,” say the research team.
As at 11.00am, shares in Sheng Siong are trading 1.3% higher for the day at $1.55.
