Citi Research analyst Chong Zhou has upgraded Sheng Siong to “buy”, while increasing his target price to $1.68 previously, following “quality” tender wins and resilient inflation in Singapore. Zhou has taken over coverage of the stock from analyst Luis Hilado, who rated Sheng Siong “sell” with a target price of $1.43 as at July 16.
Since late February, the analyst notes that the stock has corrected -5.8%, a -14.8% underperformance in comparison to the Straits Times Index (STI), which is up 8.7%.
“While some of the original concerns remain valid, we believe the potential outweighs the risk given the recent positive developments,” says Zhou in his report dated July 21.
Following the release of four additional tenders by the Housing Development Board (HDB) in 2Q2024, Sheng Siong secured three out of the four new tenders, with two of them currently in operation within the same period.
“Under the expectation that the remaining store will open shortly as well, Sheng Siong would have opened at least five new stores in FY2024, well exceeding their [annual] target of three,” Zhou writes.
In response, the analyst has upgraded his estimate for the group’s number of new store openings in FY2024 from three to six, given Sheng Siong’s new tender wins alongside the potential win of at least one additional tender win.
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Additionally, Zhou notes that Sheng Siong is set to benefit from the resilience of Singapore core inflation.
“Singapore core inflation remains at 3.1% for the third consecutive month in May, landing us back exactly where we started in January 2024,” he adds.
Core inflation is expected to stay on a “gradual moderating” trend over the rest of the year, with a significant decrease in 4Q2024, according to the Monetary Authority of Singapore (MAS).
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Given the current expectation of a gentler-than-expected disinflation trend, the group is positioned to benefit from the delay of the reversal of consumer downtrading, such as dining-in.
The analyst also notes that house brands, which currently enjoy a 10% - 15% higher margin than national brands, have increased from 7% to 8% of total revenue, an estimated 3% increase from pre-Covid-19 levels.
On the back of new store wins in 2Q2024 expected to mature over the next few quarters, the analyst expects a stronger performance for Sheng Siong in 2HFY2024.
“The new stores will take time to mature and reach their full revenue potential as time is needed for people living in the neighbourhood to change their shopping behaviour,” adds Zhou.
That said, the non-extension of goods and service tax (GST) absorption alongside the lack of return discount provided for community development council (CDC) purchases by the group, may result in a drag on Sheng Siong’s 2Q2024 performance.
Following these developments, the analyst has increased his FY2024 revenue and profit after tax and minority interest (patmi) forecast by 3.6% and 4.5% respectively.
Similarly, Zhou’s estimates for FY2025 - FY2026 earnings are up an estimated 6%.
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At its current share price levels, Zhou sees this as a “good time” to accumulate shares in Sheng Siong.
“Given the recent positive developments, we believe Sheng Siong is likely undervalued due to overcorrection and cheap valuation when compared to its peers,” he says.
Based on Sheng Siong’s last-closed price of $1.47 on July 19, the counter is trading at -2.3 standard deviations (s.d.) below the mean, compared to the benchmark STI’s -0.9 s.d. below its mean.
As of 11.10am, shares in Sheng Siong are trading 2 cents higher or up 1.36% at $1.49.
