Analysts have mixed sentiments on supermarket operator Sheng Siong following its latest FY2023 ended Dec 31, 2023 results.
To recap, the group’s earnings for the full-year period came in at $133.7 million, a slight 0.3% higher than $133.3 million last year. Revenue also saw a marginal increase of 2.1% y-o-y to $1.37 billion. The increase was primarily driven by the six new stores, which contributed a 2.5% y-o-y increase to total sales. This was partially offset by a lower revenue contribution from the Yishun store that was closed in FY2022 due to lease expiration.
For the 2HFY2023 period, revenue was 2.2% higher y-o-y at $677.2 million, while earnings gained 3.6% y-o-y to $68.3 million.
See: Sheng Siong posts 0.3% increase in FY2023 earnings to $133.7 mil
The results, however, did not meet the expectations of Citi Research analyst Luis Hilado. Hence, he has reaffirmed his “sell” call on the stock with a target price of $1.43.
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Positive sentiments
Meanwhile, RHB Bank Singapore is much more bullish as it has kept its “buy” recommendation, but with a lower target price of $1.96 from $1.99 previously.
Analyst Alfie Yeo says: “We remain upbeat on Sheng Siong with growth fuelled by new outlet wins and better consumption on higher purchasing power from the Budget 2024 announcement.”
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He expects the group to be a beneficiary of the latest budget announcement, which will help boost consumer purchasing power and consumption, especially from the CDC vouchers.
Yeo also expects new store openings to be robust on the Housing & Development Board’s (HDB) healthy pipeline of new outlets. He elaborates that HDB has a pipeline of five new supermarkets outlets up for tender over the next six months, with eight more lined up beyond the six months till end 2024. Sheng Siong is expected to secure some of these outlets and Yeo assumes three outlets per annum in his forecast assumptions, adding to the 69 stores its currently has.
While risks include slower-than-expected store openings, lower sales demand and per sq ft traction and the inability to maintain gross profit margins at current levels, Yeo expects the group’s performance to remain resilient as it targets the mass market value segment, which will enjoy effects of downtrading in a soft consumption environment.
“Valuation at -1 standard deviation (s.d.) from its historical mean forward P/E (about 19x) is attractive. The stock is also supported by approximately 4% FY2024 yield,” says Yeo.
Neutral view
On the other hand, DBS Group Research has reiterated its “hold” call and $1.62 target price on Sheng Siong.
“We have adjusted our earnings forecast on the back of higher store count growth and faster gross margin expansion. While we continue to like the company’s pace of execution, we do not see any material near-term re-rating catalyst,” say analysts Chee Zheng Feng and Andy Sim.
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While they continue to like the company’s strong pace of execution, in the short term, they believe the higher-for-longer interest rates will continue to put a cap on share price.
Chee and Sim also like the stock for its track record of securing products at competitive prices. It has been able to deliver consistent gross margin expansion due to its ability to procure products at competitive prices. “With its strength in competitive sourcing, Sheng Siong is well-positioned to supply price-competitive offerings while being able to grow its margins consistently over time,” say the analysts.
Moving forward, growth in FY2024 and FY2025 is expected to come from new stores and continued margin expansion.
“With one tender secured and 10 upcoming for the year, we believe the company has more than an even chance of securing at least four stores this year (versus the previous expectation of three). In addition, given the strong gross margin showing in FY2023, we also made an upward revision to our gross margin assumptions for FY2024F/FY2025, from 29.9%/30.0% to 30.2%/30.4%,” they say.
The analysts are also looking out for upcoming HDB tender results. “Apart from the winning bid, we are also watching the timeline of the tender process. We are seeing early signs pointing at the normalisation of the tender approval process, with the October 2022 tender results announced in January 2024, within the typical three-month timeframe,” say Chee and Sim, adding that this solidifies their optimism for the tender results that are to be announced this year for the 10 pending stores and thus the growth of Sheng Siong’s overall store count.
As at 2.20pm, shares in Sheng Siong are trading at $1.53.
