Analysts are keeping their positive outlook for Sheng Siong after the supermarket group reported a net profit of $39.1 million for the 3QFY2024 ended Sept 30, 12.4% higher y-o-y. The group’s net profit for the 9MFY2024 increased by 8.7% y-o-y to $109.1 million.
Sheng Siong also reported revenue of $363.2 million for the 3QFY2024, 5% higher y-o-y and 9MFY2024 of $1.08 billion, 4.0% higher y-o-y.
PhillipCapital analyst Paul Chew has maintained his “accumulate” call with a higher target price of $1.74 from $1.66 previously after Sheng Siong’s 9MFY2024 revenue came within his expectations at 75% of his full-year estimates. Sheng Siong’s 9MFY2024 patmi exceeded Chew’s estimates at 79% of his full-year forecast. The analyst’s new target price is based on a historical P/E of 18 times.
“Progressive wage reimbursement and gross margins were higher than expected. Gross margin was a record 31.3% in 3QFY2024 from higher fresh product contribution and margins,” he writes in his Nov 1 report.
Despite the positives, Chew is concerned over Sheng Siong’s “lacklustre” same-store sales, which grew 1.8% y-o-y in 3QFY2024, boosted by this year’s 1 percentage point increase in GST. “Sheng Siong is trending towards the pre-pandemic average of [around] 1% growth,” he notes.
However, Chew has also raised his FY2024 forecast by 5% to $145.8 million.
“Sheng Siong will at least open five new stores in FY2024. This will almost triple the average of two new stores per year over the past three years. New stores will provide at least 6% points of revenue growth next year. The unknown has been sluggish in same-store sales of around 2%, which includes the recent GST hike,” he points out.
“Sheng Siong’s attractive financial metrics include a return on equity (ROE) of 27%, a dividend yield of 4.0%, and net cash of $350 million,” he adds.
RHB Bank Singapore analyst Alfie Yeo has also kept his “buy” call with a higher target price of $2 from $1.88. Yeo’s new target price represents an upside of 27% to Sheng Siong’s last-traded price of $1.58 as at his report on Oct 30 and a yield of 4%. His target price is rolled over from a P/E of 21 times from Sheng Siong’s blended FY2024 to FY2025 blended earnings to FY2025’s earnings base.
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Like PhillipCapital’s Chew, Yeo found Sheng Siong’s revenue in line with his estimates while the group’s gross margins stood above his expectations. Sheng Siong’s 3QFY2024 ebit of $46 million, 16% higher y-o-y, also came above Yeo’s estimates due to better gross margins and higher progressive wage credit grant from the government.
The analyst has also increased his earnings estimates for FY2024 to FY2026 by 6% after factoring in higher gross margin assumptions based on the current run rate. Yeo now expects Sheng Siong’s recurring net profit to come in at $143 million, $149 million and $156 million for FY2024, FY2025 and FY2026 respectively.
Yeo also expects to see growth driven by the group’s store network.
“Sheng Siong has outperformed our store opening target of three for the year, having opened four new stores. There are four other bids awaiting tender results and a new confirmed Toa Payoh outlet opening in the coming months,” he writes.
“The Housing & Development Board (HDB) will also have one more tender put up for bidding in 4QFY2024. According to HDB’s upcoming units scheduled for tender, there will be one supermarket available for tender by May 31, 2025, at Mount Vernon Road,” he adds. “China now has six outlets – having opened one in 2QFY2024 – and now contributes 2.6% of 3QFY2024’s revenue. We now expect a more positive earnings outlook, driven by contribution from newer outlets and better gross margins.”
Overall, Yeo likes the group for its earnings growth momentum, attractive valuation at near -1 standard deviation (s.d.) or around 17 times from its historical mean forward P/E of 19 times, strong cashflow generation, stable balance sheet and good dividend payout.
Citi Research analyst Chong Zhou kept his “buy” call on Sheng Siong with an unchanged target price of $1.74 as he sees the group’s upside potential continuing to be present. The group’s 3QFY2024 results were also consistent with Zhou’s estimates.
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In his Oct 30 report, Chou posits that the new stores secured in the 3QFY2024 could potentially translate into higher revenue for FY2025.
He adds that it is likely for the group to win another new store – likely at 161 Ang Mo Kio Ave 4 – before the end of this year.
“While the chance of the additional new win to open in 2024 is highly minute, it is likely to contribute positively to FY2025 given its longer operational runway in the new year (assuming it opens in early 1QFY2025),” he writes.
Zhou also sees the possibility of Sheng Siong to report a higher gross profit margin in the 4QFY2024 although this may be lesser given the stronger competition.
In FY2025, the analyst sees the decline in utility costs potentially offsetting the progressively declining government grants.
“While 3QFY2024 staff cost at $56.1 million (+11.9% y-o-y, +8.3% q-o-q) continues to outpace revenue growth (+5.0% y-o-y, +7.5% q-o-q), it was partially offset by the receipt of a $4.1 million (lower versus last year at $5.8 million) government grant from the progressive wage credit scheme, which encourages the wage increment of lower-wage workers,” he notes.
“The percentage reimbursed by the scheme is expected to progressively decline annually over the course of the scheme. On a positive note, Sheng Siong has managed to re-contract at a lower utility rate ([around] 10% lower in terms of base unit cost) for FY2025,” he adds. “As such, the decline in utility cost (assuming variable cost component remains constant) could potentially offset the decline in government grant in FY2025.”
Shares in Sheng Siong closed 1 cent higher or 0.63% up at $1.60 on Nov 1.
