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Inflation to give Sheng Siong a boost

·3-min read

After the reopening euphoria settles, the reality of inflation kicks in. And this is where Sheng Siong will be a beneficiary.

As the Covid-19 pandemic tapers down and Singapore moves ahead towards an endemic, consumers have stopped panic buying and are happily going out for their meals. While most analyst can see this as a negative for Sheng Siong, as that would mean less consumers in supermarkets and smaller basket sizes, RHB Group Research believes that the dependency on supermarkets is not over.

RHB analyst Jarick Seet believes that Sheng Siong is a beneficiary of the current rising inflation. Consumers may release some pent-up demand of dining out, but after that the reality of inflation sets in and it is back to the regular programme.

RHB Group Research hence has upgraded its call on Sheng Siong to “buy” from “neutral” with a higher target price of $1.78 from $1.51 previously. He believes that the stock is well-positioned as a “value-for-money” supermarket chain and that will be its selling point to be a key beneficiary of this normalisation. He also views the stock as a defensive option, especially in such a volatile market condition.

“We believe that inflation will likely outweigh the negative impact of the economic reopening, as reality is apt to sink in once the euphoria related to travel and the reopening of F&B and leisure outlets is over,” says Seet.

Thereafter, more people are likely to stay home and have more homecooked meals, which is a more economical option.

In addition, Seet believes that Sheng Siong will likely be able to raise prices to pass on costs while preserving margins – something it has achieved in the past when prices rose. In fact, this might turn out to be a net positive for the company, as the increase in the cost per item will lead to a larger net spend per customer. “Sheng Siong may maintain its gross profit margin, while widening its net profit margin, looking ahead,” adds Seet.

Meanwhile, for the past two years, the group has seen the supply of new Housing and Development Board (HDB) commercial space being affected for various reasons – although this is expected to improve gradually. In 2021, the company secured leases for three stores.

Sheng Siong is expected to open three to five new stores yearly over the next three to five years, focusing on areas where it does not have a presence.

“We expect the rise in inflation to be a positive for Sheng Siong, which will help to mitigate any dampener stemming from Singapore’s border and economic reopening. Inflation should also boost its topline,” says Seet who has lifted FY2022 Patmi forecasts by 17%.

As at 10.40am, shares in Sheng Siong are trading at $1.53, some 4.08% higher YTD. The stock is also trading at a FY2022 PE of 16.27x with a dividend yield of 4.3%.

 

Photo: The Edge Singapore/ Albert Chua

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