RHB Bank Singapore’s analyst Alfie Yeo has maintained his “overweight” rating on Singapore grocery retailers as he anticipates a sustained growth in earnings and a continued upward trend in consumption in 2024.
“The sector remains resilient, in our view, as [its] core earnings performance continues to hold up,” Yeo writes in his sector report dated March 26.
He adds that the sector’s valuation at 13 times to 16 times FY2024 P/E is “compelling”. Overall, the sector has a dividend yield of 4%, which Yeo deems as attractive.
Among the sector, Yeo likes Sheng Siong Group OV8 and DFI Retail (DFI), identifying them as his “top picks”. He has given both counters “buy” calls with target prices of $1.96 and US$2.80 ($3.77) respectively.
Following the healthy recovery of Hong Kong and China operations for DFI and the influx of new stores for Sheng Siong, the analyst expects a compound annual growth rate (CAGR) growth outlook of 22% and 5% respectively.
For the FY2023 ended Dec 31, 2023, Sheng Siong’s full-year earnings came in line with Yeo’s expectations while DFI’s core operating profit stood above his estimates. New stores were a key driver of revenue growth for Sheng Siong although its operating margins were weaker due to lower other income and supplier rebates. DFI’s revenues were flat although it showed optimistic performances within sales and operating leverages especially within the beauty and health sectors.
That said the earnings revision for the sector’s estimates for the FY2024 - FY2025 were negative with DFI’s joint venture (JV) and, or associate income as the main contributor. Excluding this and one-off expenses, the analyst states that the sector’s core operating profit performed well and “exceeded expectations”.
In the analyst’s view, both Sheng Siong and DFI are “well placed for growth”. “DFI is on track for earnings recovery while Sheng Siong is in the sweet spot to bid for more new Housing & Development Board (HDB) outlets,” he says.
Despite previous effects from border shutdowns and Hong Kong security laws, DFI is showing a favourable turnaround. Revenue growth and margin leverage are present within the sectors of convenience stores and healthy and beauty segments. The analyst expects the future influx of tourists in Hong Kong to continue to sustain this upward turn for DFI.
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In addition, the sector looks set to benefit from Singapore’s better GDP growth in 2024, which should lead to the bouncing back of industries and global demand, thereby leading to positive consumption and income from the workforce. RHB Bank Singapore’s economics desk anticipates a 2.5% growth of Singapore’s GDP this year.
Plus, Sheng Siong should be a beneficiary of the strong supply of new HDB supermarkets, which is expected to be up for bidding in 2H2024 and 2025. These developments will provide greater acquisition opportunities, benefitting supermarket players, says Yeo.
To this end, Yeo pinpoints DFI as a key player for earnings recovery. The analyst notes new CEO Scott Price devising to achieve sustained increased growth together with expanding consumer demand. Alongside the efforts of parent company, Jardine Matheson Holdings J36 , to uphold dividends at group level, DFI’s dividend yield is “decent”. As of now, the stock trades at an appealing 13 times FY2024 P/E against the analyst’s projected P/E of 17 times.
Yeo is also recommending investors buy Sheng Siong for its stable earnings growth. “We are also upbeat on Sheng Siong, with growth fuelled by new outlet wins and better consumption on higher purchasing power from the Budget 2024 announcement,” he says.
With the steady addition of new grocery outlets, Yeo anticipates “robust” store openings. Additionally, the introduction of the Assurance Package and Community Development Council (CDC) vouchers provided to consumers in 2024 will drive up consumption with Sheng Siong being a beneficiary of these policies. The analyst sees SSG’s valuation at -1 standard deviation (s.d.) from its historical mean forward P/E of around 19 times as “attractive”. Additionally, the stock is favourable based on the analyst’s FY2024 estimates of a dividend yield of 4%.
As at 2.45 pm, shares in SSG and DFI are trading at $1.54 and US$2.10 respectively.
