Citi Research analysts Luis Hilado and Chong Zhou have downgraded their call on Sheng Siong Group OV8 to “sell” from “buy” ahead of the supermarket operator’s results for the 4QFY2023 ended Dec 31, 2023.
During its results for the 9MFY2023, Sheng Siong’s profit for the period dipped by 0.1% y-o-y to $100.4 million.
As the final quarter has historically been a slow one for the group due to an increase in consumers dining out, the analysts have lowered their full-year profit after tax and minority interests (patmi) estimates by 5.1%. Their FY2023 revenue forecast has also been lowered by 1.6%.
In FY2024, the analysts don’t see any significant growth to the group’s revenue. Although the group is “well-positioned” to open at least three new stores this year, the gross floor area (GFA) growth is unlikely to translate into meaningful topline growth.
“Among the newly secured stores in October 23, we believe only the Clementi store can make significant revenue contribution in 2024 as the Bukit Batok store will likely cannibalize sales from a nearby Sheng Siong store,” note Hilado and Zhou in their Feb 25 report.
“The potential of the six new upcoming leasing spaces is equally underwhelming for Sheng Siong, in our view, due to timeline constraints and unfavourable locations. Same-store sales (SSS) growth is expected to be challenging as dining-in trend likely reverses with inflation tapering and Community Development Council (CDC) distribution is unlikely to promote higher consumption,” they add.
See also: 'Sell' Sheng Siong on problematic GFA quality, consumer downtrading trend, limited margins: Citi
Furthermore, the analysts see signs of Sheng Siong’s earnings plateauing with the improvements in gross profit and ebitda margin tapering off from the last three years. The group has, however, seen its gross profit and ebitda margin improving on a y-o-y basis over the last five years due to a better product mix.
To this end, Hilado and Zhou see the group’s ebitda margin turning flattish at around 15.0% in FY2024 despite the 25% reduction in its annual electricity bill. This is due to the GST absorption and elevated administrative expense, they note.
“While Sheng Siong has announced to offset GST increase for most items in 1QFY2024, we anticipate Sheng Siong to follow NTUC’s practice and extend GST offset into 1HFY2024,” they add.
The analysts have lowered their FY2024 revenue and patmi estimates by 5.9% and 14.7%. Their target price has also been lowered to $1.43 from $1.92 previously.
As at 10.30am, shares in Sheng Siong are trading flat at $1.57.
