Citi Research is reaffirming its “sell” recommendation on supermarket operator Sheng Siong with a target price of $1.43 following the group’s recent FY2023 ended Dec 31, 2023 results announcement.
Earnings for the full-year period came in at $133.7 million, a slight 0.3% higher than $133.3 million last year. Revenue also saw a marginal increase of 2.1% y-o-y to $1.37 billion. The increase was primarily driven by the six new stores, which contributed a 2.5% y-o-y increase to total sales. This was partially offset by a lower revenue contribution from the Yishun store that was closed in FY2022 due to lease expiration.
For the 2HFY2023 period, revenue was 2.2% higher y-o-y at $677.2 million, while earnings gained 3.6% y-o-y to $68.3 million.
The results, however, did not meet the expectations of analyst Luis Hilado, as well as consensus.
“While GFA has increased by about 1.73% from approximately 607,800 sq ft to around 618,300 sq ft, Sheng Siong seems to have turned negative again in the 4QFY2023 given that 2HFY2023 is lagging far behind 3QFY2023,” says Hilado.
He also notes that while the group has won three tenders (one in FY2023 and two in early FY2024), well positioning itself to reach its target of opening three new stores in 2024, the focus of the group should be on the quality rather than the quantity of gross floor area (GFA).
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To prevent sales cannibalisation and increase competitiveness compared to neighbouring NTUC, Sheng Siong offered following countermeasures: attempts to run neighbouring stores as a “single store” via better product placement and greater discounts for stores positioned near competitors.
“Despite these, we maintain our cautious view due to the novelty of the ‘single store’ concept where effectiveness is unproven, price cutting might hurt Sheng Siong in the long-run and trigger price competition with NTUC,” says Hilado.
Meanwhile, Hilado expects consumer downtrading trend to reverse with more frequent dine-outs.
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Despite the group citing inflation being higher than pre-Covid-19 levels and the increased cost of living, real median household income has risen by 2.8% in 2023 alongside expectations from the Monetary Authority of Singapore (MAS) of “overall inflation to ease at a faster pace in 2024”.
In fact, core inflation unexpectedly slowed to 3.1% y-o-y in Jan, due to lower-than-expected hike in utilities prices, and only 50% of the 1 percentage point (ppt) GST hike was passed through.
“While our ebitda margin forecast has improved by 30 basis points (bps) from 15.0% to 15.3% due to the non-extension of GST absorption, the scope for further margin remains limited as we believe benefits from improving product mix has tapered,” says Hilado.
Despite the group highlighting additional new measures to improve margins by passing on greater proportion of non-fresh cost to consumers, this strategy is unlikely to be successful, according to the analyst, due to the current competitive landscape.
In addition, FY2023’s ebitda under-performance can be partially attributed to the y-o-y increase in staff cost and utility expenses.
Sheng Siong has also increased wages for lower-wage workers in January 2024, further supporting Hilado’s view and the current trend of administrative expense (prior to reclassification) taking on a greater proportion of revenue. Hence, he sees the possible slower pace of margin improvement going forward into FY2024.
As at 2.00pm, shares in Sheng Siong are trading at $1.55.
