RHB Bank Singapore analyst Alfie Yeo is keeping his “overweight” call on the retail-staples sector as he sees stronger consumption on the cards.
“Our economics desk estimates Singapore’s 2023 GDP growth forecast at 1.5% before accelerating to 3% in 2024 – driven by with an improving external environment,” says Yeo in his Jan 3 report.
“This should translate into more positive consumption and income from the workforce eventually, as domestic industries recover and benefit from a more robust global demand,” he adds.
Within the sector, Yeo has named Sheng Siong Group OV8 and DFI Retail Group D01 (formerly Dairy Farm) as his top picks. The analyst likes Sheng Siong for its stable earnings and dividends and DFI for its earnings turnaround and strong dividend yield.
The analyst, who has “buy” calls for both counters, sees valuations at 13 to 17 times FY2024 P/Es as “currently compelling”. Both Sheng Siong and DFI have dividend yields of 4% to 6%. Sheng Siong has an earnings growth outlook of 7% while DFI’s is 17%.
Furthermore, the latest reported earnings for both counters during the 3QFY2023 were largely in line with Yeo’s expectations. Both counters’ year-ends are in Dec 31.
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“Revenue growth was driven by new outlets for Sheng Siong, while for DFI, tourist recovery to Hong Kong and demand recovery drove strong same-store sales growth at Mannings and its convenience division,” says Yeo. “There were minimal changes to our earnings forecasts post 3QFY2023 earnings as results were within expectations.”
Following the Covid-19 pandemic, the analyst sees supermarket sales to be normalised going forward.
“Revenue growth for the sector is now largely at a more normalised and moderated pace from abnormal levels seen during Covid-19 restrictions. We hence expect low to mid-single digit revenue growth for Singapore grocery retail sales for 2024, with the index at around 120-point levels,” he writes.
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In the next six months, there will be eight new Housing & Development Board (HDB) supermarkets up for bidding albeit reducing the pipeline of planned new HDB supermarkets to two in the 2H2024.
“Nonetheless, the robust supply that is expected to come on stream in the shorter term will benefit supermarket players a whole, offering more opportunities for grocery retail players overall to win more new outlets,” says Yeo.
“Our investment thesis on DFI is based on earnings recovery (18% earnings compound annual growth rate or CAGR growth from FY2023 to FY2025) at a compelling valuation. We anticipate a recovery in FY2024 – driven by an expected pickup in demand in the various markets, and improving domestic consumption,” he adds. “Dividend yield is attractive due to parent company Jardine Matheson Holdings J36 ’ practice of uplifting dividends back to the group level. We see earnings driven by sturdy domestic consumption and a pick-up in tourism in Hong Kong, on top of the continued economic recovery in Asean and China.”
Based on Yeo’s estimates, DFI is currently trading at an attractive 14 times FY2024 P/E versus his implied target P/E of 17 times.
On Sheng Siong, the analyst sees the group growing via its new outlets, the performance of its new stores and better operating efficiency with plans for a new distribution centre.
“Outlook is positive, based on domestic supermarket consumption, new store outlook, and its China operations. Sector risks include margins pressure from higher-than-expected operating costs and/or consumer demand,” he says.
Yeo has a target price of $1.99 for Sheng Siong and US$2.92 ($3.88) for DFI.
As at 11.24am, shares in Sheng Siong and DFI are trading at $1.57 and US$2.28 respectively.
