UOB Kay Hian (UOBKH) analysts John Cheong and Heidi Mo have kept their “buy” call on Sheng Siong Group OV8 following its 1QFY2024 results ended March, which was “largely in line” with their expectations.
The analysts have too kept their target price at $1.88.
As cost of living rises, Cheong and Mo believe that consumers may shift towards the group’s value-for-market products.
The supermarket operator reported revenue and earnings of $376 million (+5.5% y-o-y) and $36 million (+8.9% y-o-y) respectively for the 1QFY2024, both forming 27% of UOBKH’s full-year forecasts.
The group’s 1Q results typically form around 26% of their full year earnings from higher seasonality, they say. This top line growth comes from higher comparable same-store sales by 8% y-o-y and 0.1% y-o-y in Singapore and China respectively.
Of the 8% growth in Singapore stores, 3.6% is contributed by 63 matured stores, while the remaining 4.4% is by four stores opened in 2022, the analysts note. They say that consumer spending had also picked up during the extended sales period from a later Chinese New Year.
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Sheng Siong’s gross profit margin climbed 0.6 percentage points (ppt) y-o-y to 29.4%, from a more favourable sales mix of higher-margin products like its house brands and non-fresh items, a testament to the group’s effective cost controls like diversification of supply sourcing, say the analysts.
Meanwhile, operating expenses rose 8.8% y-o-y due to higher staff costs from the increment of staff variable bonuses because of better financial performance.
This was marginally offset by higher interest income of $3.3 million (+22% y-o-y) from more fixed deposits placed during the quarter, and an expansion by 0.3 ppt y-o-y in net margin as a result, according to the analysts.
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Cheong and Mo note that Sheng Siong secured one new store in the first quarter of 2024, with 70 stores in Singapore as at end March, totaling a retail area of 623,677 square feet (+1.7% y-o-y).
The outcome of three January 2024 tenders are still pending, says the analysts. More HDB projects are also expected to provide more tendering opportunities for Sheng Siong, with six more locations expected to be up for tender in the next six months.
The analysts note that the number of operators bidding for new stores has dwindled from four to six to around three.
“We think that Sheng Siong will be able to achieve growth through the continuous expansion of its network of outlets in Singapore and reach its target of at least three store openings annually,” say Cheong and Mo. “In China, its operations remain profitable, making up 2.3% of 1QFY2024 revenue. Sheng Siong expects its sixth store in Kunming to be operational by 2Q2024.”
In addition, as core inflation is expected to slow to 2.5%-3.5% in 2024, the sustained inflationary pressures and goods and services tax (GST) hike is expected to push consumers toward more value-for-money purchases.
“As consumers cut back on dining out, Sheng Siong will stand to benefit from boosted sales,” they say.
As such, the analysts keep their target price at $1.88, pegged to an unchanged 2024 PE of 21x, or five-year average mean PE. They continue to like Sheng Siong for its sustainable growth, from the successful execution of steady store expansion, and as a beneficiary in the persistent inflationary environment.
As at 12.20pm, shares in Sheng Siong are trading flat at $1.49.
