Better days ahead for Sheng Siong but some near-term drag from GST discounts

Sheng Siong may see some near-term drag but it's long-term potential remains. CGS-CIMB recommends to accumulate.

CGS-CIMB Research is reiterating its “add” recommendation on supermarket operator Sheng Siong OV8 with an unchanged target price of $1.88, as it continues to like Sheng Sion as a defensive play amid the current backdrop of elevated inflation and economic slowdown.

This call is also released just ahead of the group announcing its 1QFY2023 ended March results on Apr 28.

Analysts Ong Khang Chuen and Kenneth Tan believe that Sheng Siong had a slow start to the year, with net profit declining to $31.5 million (-5% q-o-q, -10% y-o-y) in 1QFY2023. “We also believe revenue growth was flattish (-1% y-o-y) during the quarter, with weaker same store sales (high base from 1QFY2022 prior to relaxation of Covid-19 measures) partially offset by an increased store count,” say the analysts.

However, they think that operating profit margin (OPM) contracted by 1.7 percentage points (ppt) to 10.4%, due to Sheng Siong offering a 1% discount on a majority of its goods from January to March to help consumers counter the GST hike effective this year, and higher utilities costs upon electricity contract renewal in December 2022.

Nonetheless, Ong and Tan project better quarters ahead for Sheng Siong, with revenue growth likely returning to positive territory in 1QFY2023 on normalised comps (Singapore relaxed Covid-19 restrictions in April 2022), and consumer spending supported by various inflation offset measures (GST Voucher scheme and Assurance Package) provided by the government.

With Singapore’s slowing GDP growth, the analysts believe that Sheng Siong’s value-for-money proposition enhances its defensive qualities. Its widening house brand rollout also offers better value for consumers while providing upside to gross margins.

Sheng Siong is also believed to be on track to meet its target of three to five new store openings per annum.

According to the group’s FY2022 annual report, it opened a new store in Singapore in March this year (located at 91 Jalan Satu) and will be opening its fifth outlet in Kunming, China, within 1H2023.

“To ease the tight housing supply, the Housing Development Board (HDB) plans to launch more built-to-order (BTO) flats in the near term to meet the strong demand, which could translate to more expansion opportunities for SSG, in our view,” adds the analysts.

There are 13 new HDB locations up for tender over the next 18 months (five new locations over the next six months and the analysts forecast four new store openings in FY2023.

“We think investors could look for opportunities to accumulate post the 1QFY2023 results,” say Ong and Tan.

As at 2.20pm, shares in Sheng Siong are trading at $1.76.

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