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Sheng Siong stays resilient amid volatile and high inflation environment: UOBKH

Despite a dip in 1Q results, UOBKH is keeping Sheng Siong a 'buy' on a healthy outlook.

UOB Kay Hian is reiterating its “buy” recommendation on supermarket operator Sheng Siong OV8 with an increased target price of $1.97 from $1.91 previously, following the group’s release of its 1QFY2023 ended March results.

Net profit for the period was 5.2% lower y-o-y at $33.4 million, but analysts John Cheong and Heidi Mo say that it is still within expectations and accounts for 24% of their full-year estimate. Revenue also dipped a slight 0.4% y-o-y to $365.5 million, due to continued normalised demand.

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Compared to the same period a year ago, mobility restrictions have largely eased, leading to more people dining out and travelling overseas. Comparable same-store sales weakened by 3.6% y-o-y in Singapore and 0.4% y-o-y in China, mostly offset by a 3.6% contribution from operations of five new stores opened in FY2022 and 1QFY2023 in Singapore.

Meanwhile, gross margins for the 1QFY2023 period improved by 0.1 percentage points (ppt) to 28.8% due to a more favourable sales mix.

“Despite higher input costs, Sheng Siong has managed to maintain its gross margin, proving its ability to pass rising costs on to customers. The defensive nature of consumer staples enables Sheng Siong to raise prices without losing consumers,” say Cheong and Mo.

The analysts also note that net margin has remained rather stable at 9.4%, compressed by higher administrative expenses (+6.5% y-o-y) incurred. This mainly comprises a $2.1 million increase in utility expenses arising from the group’s renewal of its electricity contract at a higher market rate, and a $1.5 million rise in staff wages pushed by the tighter labour market.

Meanwhile, interest income increased 606% y-o-y to $2.7 million in 1QFY2023 (+45% q-o-q), owing to higher fixed deposit interest rates enjoyed during the quarter.

During the first quarter, the group also opened one new store, bringing the total number of stores in Singapore as at end March to 68, translating to a total retail area of 613,075 sq ft (+6.3% y-o-y).

The analysts are upbeat on the Singapore government’s ramp-up in supply of HDB and BTO estates, with 11 HDB supermarket locations up for tender across the next 11 months, for the group. This will support Sheng Siong’s expansion agenda of three to five store openings per year.

The government (Ministry of Trade and Industry), has also forecasted overall inflation to grow by 4.5% to 5.5% in 2023, while core inflation is forecast at 2.5-3.5% after excluding the impact of the increase in goods and services tax (GST) from 7% to 8% on Jan 1.

“The sustained inflationary pressure will likely lead to a shift in consumer preferences toward more value-for-money purchases. As consumers cut back on dining out, Sheng Siong will stand to benefit from boosted sales. Sheng Siong should continue to enjoy healthy demand for groceries and its house brand products with its competitive pricing going forward,” say the analysts.

As for its China operations, the group has recently successfully opened its fifth store in end-April, increasing the total retail space in China to 107,802 sq ft (+40.7% y-o-y).

Although comparable same-store sales fell by 0.4% y-o-y in China, management notes that all four stores are now profitable, likely due to higher footfall upon China’s reopening. With the fifth store commencing contribution from 2QFY2023, the analysts believe that Sheng Siong’s sales in China may see a slight increase this year.

Shares in Sheng Siong closed at $1.71 on May 11.

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