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Palatable valuations keep Sheng Siong at 'buy': RHB

Samantha Chiew
·2-min read

Shares in Sheng Siong have be declining but RHB thinks it's time to 'buy'.

RHB Bank Singapore is reiterating its “buy” call on Sheng Siong OV8 with a higher target price of $2.04 from $2.00 previously. Since the research house’s last update in May, shares in Sheng Siong have declined by about 7% from $1.77 to $1.63 on June 16, along with the wider market, including the STI Index.

While fundamentals have hardly deteriorated, valuations declined to -1 standard deviation (SD) of its historical mean forward P/E at about 16.9x. Analyst Alfie Yeo’s call is supported by about 4% FY2024 yield, as he believes valuation at current levels is attractive.

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On that note, the analyst is anticipating more comparable Singapore supermarket retail sales growth going forward. Singapore’s supermarket retail sales has normalised earlier than expected.

“We had expected supermarket retail sales to normalise around May, but it grew 0.6% y-o-y and 0.1% m-o-m in April. Prior to this, it declined y-o-y for 11 consecutive months since May 2022, due to the high base of robust supermarket retail sales resulting from Covid-19’s safe distancing restrictions in 2021,” says Yeo.

Now that the situation has normalised, he does not expect abnormal y-o-y declines of more than 5% going forward, safe for another unanticipated demand shock. Therefore, Yeo anticipates 2H2023 supermarket retail sales to be more comparable to 2H2022 henceforth.

Despite the y-o-y decline for Singapore retail sales in 1Q2023, Sheng Siong’s revenue has remained flat, outperforming the sector. Its four new outlets, which opened in 2022, will enjoy a full 12 months’ contribution this year.

The 2HFY2023 ending December sales should now be comparable with 2HFY2022’s, now that supermarket retail sales have normalised.

“We therefore do not expect significant downside to our revenue forecasts. Gross margins should sustain at close to 30% levels with more diversified sourcing and sales mix enhancements. We expect operating profit margins to be stable as well, since staff costs are highly tied to revenue performance. Hence, we believe that Sheng Siong’s fundamentals and our EPS estimates are intact,” says Yeo, who has estimated recurring EPS for FY2023 to be 10 cents.

Some key downside risks to his 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.

“However, we expect Sheng Siong’s performance to remain resilient as it targets the mass market value segment, which will enjoy effects of downtrading in a soft consumption environment,” says Yeo.

Shares in Sheng Siong last traded at $1.63 at 5.00pm on June 16.

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