Sheng Siong - Another Quarter Of Record Gross Margin
- Sheng Siong (SGX:OV8)’s 2Q22 net profit fell to S$32m (-8% q-o-q, -8% y-o-y) due to normalisation of grocery demand with the relaxation of COVID-restrictions in Singapore, which led to revenue declining 7% y-o-y to S$326m. Nevertheless, we deem the results as above expectations, with 1H22 net profit of S$67m (+2% y-o-y) forming 61%/54% of our/Bloomberg consensus FY22F.
- Key surprise was further expansion of gross margin (GPM) to a record 30.2% (+1.3% points y-o-y), which Sheng Siong's management attributed to continued improvement of sales mix towards higher margin categories (fresh goods, private label).
- In our view, strong GPM in 2Q22 reflects its successful execution of pricing strategy, with cost increments passed on to consumers while retaining its perception of value for money vs supermarket and wet market peers. We lift FY22F GPM to 29.7% (+1.2% points y-o-y) as we now think stronger GPM can be sustainable.
- Sheng Siong added two stores year-to-date (adding 20k sq ft retail area) and is set to open another in 3Q22F. Sheng Siong currently has 4 outstanding tenders, which we think is supportive of its target to open 3-5 new stores per year for the next 3 years.
- Sheng Siong’s China operations saw y-o-y profitability remain comparable in 1H22 despite COVID-restrictions, and it plans to further expand its presence in Kunming.
- We lift our FY22-24F earnings per share (EPS) forecast for Sheng Siong by 13.9-16.3% on the back of higher GPM assumptions. Upgrade Sheng Siong from Hold to ADD, as we view it as a defensive play amid current backdrop of rising inflation and potential economic slowdown.
- Our target price for Sheng Siong is raised to S$1.85 due to higher EPS forecasts, still based on 21x CY23F P/E (10-year historical mean).
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2022-07-29 2022-07-29
Previous report by CGS-CIMB:
2022-04-27 Sheng Siong Group - Good Quarter But Tougher Times Ahead
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