RHB keeps ‘buy’ on Sheng Siong in lieu of benefits from lower disposable income

The inflationary environment could lead Sheng Siong’s consumers to spend more cautiously prioritise more essential items

RHB Group Research analyst Jarick Seet has kept his “buy” rating on Sheng Siong as he sees the supermarket group benefitting from the lower disposable income on the back of inflation.

The analyst has also kept his target price unchanged at $1.78.

To Seet, the inflationary environment could lead Sheng Siong’s consumers to “spend more cautiously and lean towards prioritising more essential items”.

“Consumers may also focus on store brands or cook at home more, which should strengthen Sheng Siong’s revenue and margins,” he writes. “In addition, downtrading [from ‘premium-branded’ chains like Cold Storage, NTUC FairPrice and Jasons] may happen and shoppers could turn to more value-friendly supermarket chains like Sheng Siong to get their groceries.”

During the 2QFY2022 ended June, while Sheng Siong’s revenue slipped by 0.7% y-o-y to $676.8 million, the group’s gross profit margins (GPM) rose by 1.2 percentage points q-o-q to 29.4% in the 2QFY2022. At the same time, Sheng Siong’s net profit magins (NPM) rose by 0.3 percentage points q-o-q to 10.0%.

The lower revenue was attributable to the June school holiday period when families travel more and are less inclined to patronise the supermarket for groceries or household items, according to Seet. The higher margins were due to the surging inflation, which also pushed up utilities, cost of goods sold (COGS) and manpower costs, the analyst notes.

As such, this performance proves that Sheng Siong was able to raise prices and pass on costs to consumers, observes Seet. The group also maintained margins when many other types of businesses saw profitability decline.

In the 1HFY2022, Sheng Siong declared an interim dividend of 3.15 cents per share in 1HFY2022, which is up from the 3.1 cents declared in the 1HFY2021. With this, Seet believes that the 2HFY2022 “may bring about even better dividends”. As such, the analyst has forecast a dividend yield of 4% for the FY2022 from FY2021’s dividend yield of 3.8%.

Overall, Seet believes that the rise in inflation and recessionary fears should be a positive for Sheng Siong’s sales – and this should help to mitigate any dampener stemming from Singapore’s border and economic reopening.

“We also expect Sheng Siong to also be able to maintain its margins and pass on costs to customers, as it has previously done so in the past and proven as of 1HFY2022,” the analyst writes. “This counter presents a solid defensive option – especially in such volatile market conditions.”

As at 10.02am, shares in Sheng Siong are trading at 1 cent down or 0.62% lower at $1.61 at a FY2022 P/B ratio of 5.5x and dividend yield of 4.0%.

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