Sheng Siong Group
Add to cart
Analysts have mixed sentiments on supermarket operator Sheng Siong, following the group’s latest 1QFY2024 ended March results.
To recap, the group reported earnings of $36.3 million, 8.9% higher y-o-y. Revenue for 1QFY2024 increased by 5.5% y-o-y to $376.2 million, while the group’s net profit margin (NPM) increased 0.3 percentage points (ppts) y-o-y to 9.7%.
The higher revenue was mainly driven by an 8.0% y-o-y increase in same-store sales (SSS) and supported by a longer sales period before the Chinese New Year compared to last year.
The group’s gross profit margin (GPM) for the quarter rose by 0.6 ppts y-o-y to 29.4%.
CGS International is maintaining its “add” recommendation and $1.88 target price, as analysts Ong Khang Chuen and Kenneth Tan see the group benefitting from a later Lunar New Year this year. “We continue to like Sheng Siong for its strong operational execution and expect reacceleration of EPS growth riding on faster store openings in FY2024,” they say.
The two analysts also see more opportunities for store opening for FY2024. “We forecast four new store openings in Singapore and one addition in China for Sheng Siong in FY2024,” say Ong and Tan, while acknowledging the group’s new store opened in 1QFY2024, as well as a store expansion.
The group also sees an opportunity to acquire commercial premises to support its store expansion plan, given its strong net cash position of $352 million as at the end of March.
PhillipCapital has also kept its “accumulate” call and $1.66 target price on Sheng Siong.
Analyst Paul Chew says: “We expect Sheng Siong to continue taking market share from wet markets and peers as the competition from smaller supermarket chains ebbs.”
He expects SSS growth of 4% in FY2024, while gross margins will creep up at a slower pace.
Chew notes that only two stores were opened last year. The lack of new stores will be a drag on revenue this year. With industry-leading margins, it will be challenging for Sheng Siong to expand further. Supply chain bottlenecks include distribution centres.
Another avenue for growth is acquisitions, as the company has built up a record net cash hoard of $352 million. In China, the operation remains profitable. Target customers are the heartlands community but their supermarket concept is different than it is in Singapore. The products are very localised and loose items are commonly sold.
“Sheng Siong’s attractive financial metrics include an ROE of 27%, a dividend yield of 4.2% and net cash of $352 million,” says Chew.
Meanwhile, RHB Group Research has maintained its “buy” call on Sheng Siong with a target price of $1.96.
Analyst Alfie Yeo says: “We remain upbeat on Sheng Siong on the back of steady consumption demand and store opening opportunities. We expect tailwinds from strong SSS growth over the Lunar New Year festive period and recently issued Community Development Council (CDC) vouchers to Singaporean households to drive growth.
Yeo expects the group’s outlet opening to also be “robust”. Already the group opened one new store in 1Q2024 and has four other bids pending. The HDB is expected to put up another five stores for tender in the next six months, which offer opportunities for the group to increase its store network this year. The group also plans to open one new outlet in China in 2Q2024.
“We expect Sheng Siong to secure some of these outlets and assume three outlets per annum in our forecast assumption, adding to the 69 stores it has currently,” says Yeo.
Key downside risks to RHB’s EPS estimates include slower-than-expected store openings, lower sales demand and per sq ft traction, and the inability to maintain gross profit margins at current levels.
DBS Group Research, however, has a “hold” rating on the stock with a $1.62 target price.
Supermarket retail sales value grew about 4.4% from January to February. Assuming 1% growth in March, in line with food excluding services inflation, DBS estimates that the market likely expanded about 3.3% in 1Q2024, and the company grew in line with the overall market based on 3.6% sales growth of established stores.
Of the eight HDB stores up for tender and three awaiting results, DBS is optimistic that the company should be able to secure at least four stores given the seemingly muted bidding environment. “We believe new store contribution will likely be materially reflected in earnings towards late FY2026/FY2027 given [the] estimated two-year breakeven time frame. With utility cost likely to stay at an elevated level on high miscellaneous charges, we see earnings growth largely driven by continued gross margin expansion,” says DBS.
Citi Research has reiterated its “sell” call on Sheng Siong with a target price of $1.43. Despite growth in the latest earnings, analysts Luis Hilado and Chong Zhou note that gross floor area (GFA) quality remains a key concern. Other concerns the analysts highlighted include challenging SSS growth, tapering margin improvements and elevated administrative expense.
In 1QFY2024, the group opened two stores but management viewed one of the new stores in Bukit Batok as an extension of an existing store. Sheng Siong will be attempting to run the neighbouring stores as a “single store” under the same management team via better product placement to prevent sale cannibalisation.
“As the effectiveness of the ‘single store’ concept is unproven, we maintain our cautious view (note that SSS increased by 8.0% y-o-y while revenue only increased by 5.5% y-o-y seems to indicate limited new store revenue growth),” write the analysts in their April 26 report.
With six remaining tenders (three pending outcomes, one lost to NTUC) and two additional re-leasing tenders, the analysts believe that Sheng Siong is well-positioned to reach its target of opening at least three new stores annually.
Meanwhile, the analysts note that the dining-in trend is expected to reverse in 2024, along with the discontinuation of GST absorption will result in moderate revenue growth.—