UOB Kay Hian (UOBKH) is keeping its “buy” recommendation on supermarket operator Sheng Siong, but with a lower target price of $1.88 from $1.97 previously. “We continue to like Sheng Siong for its sustainable growth from the successful execution of steady store expansion, and for it being a beneficiary in the persistent inflationary environment,” say analysts John Cheong and Heidi Mo.
Compared to the street, UOBKH in on the positive side, along with peer RHB Bank Singapore, who has a “buy” call and $1.96 target price. Citi Research has a “sell” call and $1.43 target price, while DBS Group Research has a “hold” call and $1.62 target price.
See: Analysts mixed on Sheng Siong's prospects
To recap, the group’s 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.
See: Sheng Siong posts 0.3% increase in FY2023 earnings to $133.7 mil
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
The group’s earnings were largely in line with the expectations of Cheong and Mo, as it formed about 98% of their full-year estimates.
Revenue however missed expectations by 8%, due to lower comparable same-store sales in 4QFY2023, coming off from a high base in 4QFY2022, as consumer spending picked up earlier in preparation for Chinese New Year (Jan 23, 2023 compared to Feb 10, 2024) and the lifting of travel restrictions in most markets fuelled a resurgence in outbound travel in 2023.
Top-line growth was sustained by higher contributions from six new stores opened across 2022 and 2023.
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Additionally, gross profit margin saw an uptick of 0.6 percentage points (ppt) y-o-y to 30.0%, attributable to a more favourable sales mix of higher-margin products such as its non-fresh items. However, operating expenses rose a substantial 10.0% y-o-y due to higher utility expenses from the group’s renewal of its electricity contract at a higher market rate at end-2022, and increased staff costs from the tight labour market.
While this was partially offset by a better gross profit recorded and higher interest income, net margin marginally contracted by 0.2ppt y-o-y as a result.
“Moving forward, rising operating expenses may narrow slightly from Sheng Siong's renewal of its electricity contract at a lower market rate in 3QFY2023, offset by the group's store expansion,” say the analysts.
In 2023, the group opened two new stores, bringing the total number of stores to 69, as at end 2023, totalling a retail area of 618,349 sq ft.
Its tendering efforts remain robust, having tendered for all five stores released by HDB in 2023 and all four stores subsequently released in January. For the 2023 bids, the group secured three, while the 2024 bids are still pending.
The group continues to seek growth through the continuous expansion of its network of outlets in Singapore with a target of at least three store openings annually. “The ramp-up in supply of HDB projects provides more tendering opportunities for Sheng Siong, with five more supermarket locations expected to be up for tender over the next six months,” say the analysts.
In China, its operations remain profitable overall, making up 2.4% of 2023 revenue. Sheng Siong expects its sixth store in Kunming to be operational in 2QFY2024.
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On the outlook, the sustained inflationary pressures will continue to push consumers toward more value-for-money purchases. As consumers cut back on dining out, the analysts believe that Sheng Siong will stand to benefit from boosted sales. As for the additional $600 of Community Development Council (CDC) vouchers announced in the Singapore Budget 2024, management is of the opinion that it has limited impact on sales and is rather a different mode of payment.
Meanwhile, the group is expected to face potentially higher procurement costs that may erode margins, as the return of El Nino has greatly impacted supply harvests, leading to food operators looking to alternative sources of supply. This, together with the elevated inflationary environment, will lead to higher procurement costs. The analysts believe that margin impact from El Nino will be limited due to the group’s proven capability in maintaining margins.
As at 3.15pm, shares in Sheng Siong traded at $1.53.
