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DBS downgrades Sheng Siong to 'hold' with lower TP of $1.76 despite record quarterly gross margin

Khairani Afifi Noordin
·3-min read

The DBS analysts believe they have been too overly optimistic on their earlier FY2023/FY2024 assumptions.

DBS Group Research analysts have downgraded Sheng Siong OV8 to “hold” with a lower target price of $1.76 on possible near-term headwinds, such as slower store growth, high labour cost and sticky elevated utility cost.

This follows the company’s 2QFY2023 ended June results announcement. Based on the recent analysts briefing, the DBS analysts believe they have been too overly optimistic on their earlier FY2023/FY2024 assumptions.

For one, there is a surprise spike in labour costs of $4.6 million in 2QFY2023 versus $1.5 million increase in 1QFY2023 ended March. Sheng Siong clarified that this was due to significant salary increases in order to retain and attract workers, instead of one-off bonus payout.

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“Based on our estimate, we believe labour cost will increase by about 5%, amounting to $10 million annualised increase versus our initial assumption of about $5 million labour cost increase,” the analysts add.

To this end, DBS has assumed Sheng Siong’s labour cost to increase by $10 million and $6 million respectively in FY2023 and FY2024.

Utility expenses will also remain high in FY2024. DBS’s initial thesis suggested that utility expenses should see substantial drop in line with price decline for natural gas from Indonesia, which is key input cost for electricity in Singapore. Instead, electricity prices have ticked higher while gas prices continue to decline.

Sheng Siong is currently negotiating its electricity contract renewal, hinting that renewal rates could only be slightly lower than current rates, the analysts highlight. They assume the utility cost to remain flat y-o-y in FY2024, expecting the limited cost savings from new contract renewal to be offset by higher utility spend from new stores.

New stores

Additionally, the company noted that the tender process for this year seems to be slower than previous years. While it has submitted a bid for tender in May, the result has yet to be announced. There has also been no news to date regarding when the six HDB leases will open for tender, the DBS analysts point out.

“We assumed three new stores for FY2023 and FY2024. Given the current tender progress, we believe the entire tender process could be significantly delayed. In addition, we are cognisant of the recent NTUC FairPrice’s aggressive bid for Punggol Drive outlet, which could be an early indication of aggressive subsequent bids. Accordingly, we cut our store count growth forecast to one and two for FY2023 and FY2024 respectively,” they add.

Citi Research analyst Jame Osman expects Sheng Siong’s new store opening momentum as well as a focus on expanding its higher margin house brand products portfolio to drive its earnings performance in FY2023, given the near-term cost challenges around higher utilities and staff expenses.

He notes that Sheng Siong is targeting to open three to five new stores over the next three to five years. For FY2023, Citi forecast a 25,000 sq ft in gross floor area additions. Osman keeps his “buy” rating on Sheng Siong with a target price of $1.92.

Meanwhile, CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan note that Sheng Siong has opened one store in Kunming, China YTD. The analysts maintain their new store opening forecast at four for FY2023, although they think this could be back-loaded.

CGS-CIMB reiterates their “add” call on Sheng Siong with a target price of $1.88, continue liking the counter as a defensive play amid the current backdrop of elevated inflation and economic slowdown.

As at 12.44pm, shares in Sheng Siong are trading 1 cent lower or 0.61% down at $1.63.

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