Citi analyst Chong Zhou has maintained his “buy” call on Sheng Siong with an upgraded target price to $1.74 from $1.68. The upgrade comes as Zhou expects the group to see improvement in its FY2024 margin alongside stronger FY2025 revenue growth, due to new property acquisitions. Sheng Siong’s financial year ends in December.
In his report dated Oct 9, Zhou notes that new store opening promotions were less substantial than expected in 3Q2024, leading to improved gross profit (GP) margin assumptions for 2HFY2024.
While he admits that the new stores may be performing well without a need for substantial promotions, he notes that GP margins may plateau in FY2025 due to stronger competition in new areas of expansion.
“The strategic Jelita Property acquisition alongside new store wins in 3Q2024 and the robust new estate formation expected in 2025 provide Sheng Siong with ample opportunities to establish presence in new regions, boosting FY2025 revenue growth,” Zhou says.
FY2025 is likely to see better revenue thanks to Sheng Siong’s new stores in 512 Bishan Street 13 and 181 Lorong 4 Toa Payoh. The two new branches were acquired in 3Q2024 via a tender win for the Bishan branch and via the Jelita property acquisition for the Toa Payoh store.
“While these stores are unlikely to impact [Sheng Siong’s] 2HFY2024 results materially due to a very limited operational runway (e.g., [they] can only be opened in 4Q2024), they are expected to contribute meaningfully in FY2025 as both wins enable Sheng Siong to establish presence in new areas,” Zhou writes.
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According to the analyst, Sheng Siong may potentially have a strong start to FY2025 if Siglap V from Jelita Property acquisition becomes a new Sheng Siong store in FY2025, with more tender opportunities expected.
The strategic Jelita Property acquisition is expected to bring Sheng Siong an estimated value of $65.2 million, exceeding the $50.2 million consideration.
Sheng Siong is trading at 16.4 times its price earnings ratio (P/E ratio) based on consensus earnings estimates (16.0 times based on Citi), Chong believes that Sheng Siong remains undervalued compared to peers with a mean and median of 23.3 times and 23.1 times, respectively.
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Chong upgrades the FY2024 GP margin assumption to 30.3% and revises the FY2025 revenue upward by +1.4%, with an improved GP margin of 0.1 percentage points (ppt) as compared to FY2024.
As at 2.43pm, shares in Sheng Siong are trading 1 cent higher or 0.65% up at $1.56.
