Sheng Siong remains in analysts' carts despite lack of earnings growth in FY2022

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Sheng Siong remains a defensive play in analysts' books amid the high inflation environment.

Supermarket operator Sheng Siong OV8 recently posted its FY2022 ended Dec 31, 2022, results, which saw earnings increasing at a slight 0.4% y-o-y to $133.3 million, while revenue declined by 2.2% y-o-y to $1.34 billion.

The decline in revenue was on the back of continued normalisation that was driven by the significant easing in mobility restrictions starting Apr 1, 2022. Comparable same store sales in Singapore declined by 4.8% y-o-y, partially offset by a 2.1% contribution from five new stores – one opened in end FY2021 and four in FY2022.

Despite the decline in revenue in FY2022, gross profit remained comparable at $393.5 million to last year. This was mainly due to an increase in gross profit margin from 28.7% to 29.4% in FY2022.

The group also increased its store count in Singapore to 67 from 64 previously, while China stores remain unchanged at four.

Despite the lack of growth in earnings and revenue, analysts are still keeping Sheng Siong in their carts and increasing their target prices, as they see the stock as a defensive play amid current inflationary pressures and slow economic growth. The FY2022 results were also in line with all the analysts forecasts.

For OCBC Investment Research, analyst Chu Peng is maintaining a “buy” call on the stock with a higher fair value estimate of $1.89 from $1.86 previously.

Chu sees the stock as a defensive play heading into 2023, as she believes that demand for groceries will continue to normalise, but could be potentially supported by a shift in consumption patterns towards a focus on ‘value for money’ due to inflationary pressures and a higher cost of living.

“Moreover, grocery sales could be supported by Singapore Budget 2023’s announcement on inflation offset measures such as the GST Voucher scheme and the Assurance package,” she adds.

Meanwhile, Chu is upbeat on the group’s new store openings that are expected to be supported by the growing supply of new HDB flats. “The pace of HDB flat completion in Singapore is expected to remain elevated, leading to an increase in the supply of new HDB shorts for tender. We believe this will support Sheng Siong’s goal of opening three to five new stores every year,” says Chu.

Having the similar cravings, CSG-CIMB Research’s Ong Khang Chuen and Kenneth Tan are also keeping their “add” call on Sheng Siong with a higher target price of $1.88 from $1.85 previously. They too like Sheng Siong for its defensive play.

Till the end of March, Sheng Siong is offering a 1% discount on most of its goods to help consumers counter the GST hike effective this year, and plans to grow its house brand to offer better value. Coupled with government handouts, management notes that same-store-sales growth during the Chinese New Year period this year was similar y-o-y despite challenging comparable (earlier festive period in 2023; elevated spending in 1Q22 prior to relaxation of Covid-19 rules).

“We expect same-store-sales growth to return to positive territory in 2QFY2023 (normalised comps), but forecast 0.3 percentage points net profit margin (NPM) contraction in FY2023 with gross profit margin (GPM) strength (product mix improvement) offset by higher opex (inflationary pressures),” say Ong and Tan.

The analysts too are aware of the growing supply of new HDB flats that can help support store openings. “We believe this will open up more HDB store lease opportunities for Sheng Siong, and forecast four new store openings in FY2023,” say the analysts.

According to the analysts there are 13 new HDB locations up for tender over the next 18 months, which can support the group’s goal of three to five outlet openings per year. In China, Sheng Siong announced plans to open its fifth store in Kunming by 2QFY2023.

For RHB Group Research, analyst Alfie Yeo is reiterating his “buy” call on Sheng Siong with a higher target price of $2.00 from $1.73. “We turn more positive in our outlook for Sheng Siong, premised on a better store opening environment and GPM assumptions. Its revenue should be supported by the boost in support measures (GST Voucher Scheme, Assurance Package, and Community Development Council vouchers) in Singapore’s recent Budget 2023,” says Yeo.

Similar to the other analysts, Yeo is also upbeat on the group’s store opening prospects ahead. Hence, he expects the group to launch three new stores in FY2024, compared to two previously.

With the assumption of better GPM and revenue, Yeo has upped his FY2023-FY2024 earnings estimated by about 4% each to $144 million and $150 million, respectively.

As at 3.35pm, shares in Sheng Siong are trading at $1.65.

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