Analysts are mixed on Sheng Siong after the supermarket operator posted a strong set of results for the 1QFY2022 ended March.
Some are positive on the group’s prospects, while others are more sceptical about keeping sales up with the most recent reopening measures.
Earlier this week, Sheng Siong reported revenue of $358 million for the quarter, 6% up y-o-y, while net profit increased 13.9% to $35.2 million, up from the 1QFY2021 figure of $30.9 million.
In its earnings release, the group saw gross profit increase by 9.8% y-o-y to $102.7 million as gross profit margin (GPM) improved by one percentage point to 28.7% in 1QFY2022, due to a change in sales mix.
As such, Sheng Siong’s net profit margin (NPM) increased to 9.8% in 1QFY2022 compared to 9.1% in FY2021.
Other income however fell by $700,000 y-o-y to $3.3 million in 1QFY2022, as government grants received were reduced in pace with recovery from the pandemic.
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See: Sheng Siong records 13.9% increase in 1Q profit, but warns that demand may taper with reopening
On the back of the earnings growth, DBS Group Research analyst Woon Bing Yong has kept a “buy” rating on Sheng Siong with an increased target price of $1.76.
The positive outlook comes as various reports have found that consumers prefer items that are “value for money”, due to the economic downturn caused by Covid-19, which Sheng Siong provides, says Woon.
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“We believe this is positive for Sheng Siong, as the brand resonates with the ‘value’ proposition in Singapore, which should support sales per sq ft, even as demand normalises,” he adds.
This is in spite of the expectation that Sheng Siong’s supermarket sales wil gradually normalise in FY2022 as Singapore transitions to living with Covid-19 as an endemic, says Woon.
In his report dated April 28, the analyst projected sales per sq ft to remain approximately 24% above pre-Covid-19 levels in FY2023, suggesting that future store expansions will be more profitable.
Woon also considers how Sheng Siong’s improved margins, through fresh food and house brand sales growth, could mitigate inflationary pressures and a normalisation in demand.
Since 3QFY2020, the group has achieved successive q-o-q margin improvements, with it rising from 27% to 29.4% in 4QFY2021.
Based on Sheng Siong’s current share price, the group remains a good dividend play with a yield of approximately 4% per annum, says Woon.
“Our forecasts show that the group is on track to pay a dividend of over 5.90 cents per share in FY2022,” he adds.
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CGS-CIMB Group Research analysts Ong Khang Chuen and Kenneth Tan are more conservative on Sheng Siong, as they have kept a “hold” rating on the stock with an unchanged target price of $1.60.
The analysts say: “We see tough comps for the quarters ahead with Singapore’s reopening, and forecast FY2022’s net profit to decline [by] 16.8%.”
As the analysts look forward to 2QFY2022, Ong and Tan believe that Sheng Siong’s comparable store sales could be negatively affected, due to elevated demand tapering off with the domestic easing of social restrictions from April. This is compounded by the border reopening between Singapore and Malaysia as well.
“We continue to forecast comparable store sales of -6.5% for FY2022, given the higher comparison base in 2Q/3Q, when Singapore entered into Phase 2 Heightened Alert in mid-May 2021,” say Ong and Tan.
In an attempt to manage rising costs, Sheng Siong is diversifying its sources of supply and working with suppliers to minimise disruptions, so as to provide competitive offerings to its customers.
“We expect GPM to be well handled and remain flattish y-o-y in FY2022,” say the analysts. “Operating profit margin (OPM), however, could be negatively impacted due to weaker operating leverage.”
At the same time, however, Sheng Siong continues to do well on other fronts, as the group is on track to open two more new stores in 2QFY2022.
Sheng Siong is targeting to open three to five new stores per year for the next three to five years, especially in housing estates where it does not have a presence.
As such, the analysts project that with the recovery in construction activity, the Housing & Development Board (HDB) will release more store leases for bidding in FY2022, for Sheng Siong to increase its total retail area by 25,000 sq ft this year up 4.3% y-o-y.
Moreover, Sheng Siong’s China operations remain profitable, having opened its third store in Kunming in August 2021 and fourth store in November 2021. The group has plans to further expand its presence in Kunming.
Citibank Group Research analyst Jame Osman has kept his “sell” rating on the stock, with a target price of $1.34.
Osman believes that the stock is likely reacting positively at present due to its most recent strong set of results for 1QFY2022.
With the progressive easing of mobility and work-from-home (WFH) restrictions, there will likely be a normalisation of demand for groceries in Singapore, says Osman, in addition to the slowdown in new store openings momentum due to construction delays in public housing.
As at 1.38pm, shares in Sheng Siong are trading flat at $1.52 at a FY2022 P/B ratio of 5.0x and dividend yield of 4.0%.
