Sheng Siong Group - UOB Kay Hian 2022-10-31: 3Q22 Stable Staples; Demand Likely To Remain Resilient

Sheng Siong Group - 3Q22 Stable Staples; Demand Likely To Remain Resilient

  • Sheng Siong’s 3Q22 net profit of S$32.9m (-4.5% y-o-y) was in line with expectations, with 9M22 forming 75% of our full-year estimates.
  • 3Q22 revenue fell 4.2% y-o-y given that demand normalised from an elevated level, while gross margin jumped 0.4ppt to 29.4% on an improved sales mix. We expect demand to remain resilient in the coming quarters, as inflationary pressures lead to more cautious spending outlook.
  • Maintain BUY recommendation on Sheng Siong with target price of S$1.91.

Sheng Siong's 3Q22 results in line with expectations.

  • Sheng Siong Group (SGX:OV8) reported 3Q22 earnings of S$32.9m (-4.5% y-o-y, 1.8% q-o-q). The 9M22 results account for 75.7% of our full-year estimates. Revenue fell by 4.2% y-o-y as it normalised from higher demand owing to COVID-19 measures, the temporary closures of Jurong Fishery Port and the Pasir Panjang Wholesale Centre back in 3Q21.
  • There was a 7.2% y-o-y decline in comparable same store revenue in Singapore, partially offset by a 2.6% y-o-y rise in revenue from four new stores during the year. An improvement in gross profit margin of 0.4ppt to 29.4% is also observed, as a result of a favourable sales mix.

Continued expansion in Singapore.

  • Sheng Siong has successfully achieved its annual target of 3- 5 store openings for the next 3-5 years. The group has opened three new stores in 1H22 alone and continues to strengthen its network in Singapore, and a recent fourth store opened in late-October.
  • Despite a store in Yishun Central closing upon lease expiry, Sheng Siong’s total retail space grew by 31,301sf (+5.5% y-o-y). As the construction industry returns to work, the supply of new HDB shops is expected to increase. Given that Sheng Siong’s store count is a significant growth driver for its top-line, we see further upside from potential new store openings.

Higher operating expenses.

  • Total operating expenses have increased to S$62.3m (1% y-o-y, 4.5% q-o-q) in 3Q22 from S$61.7m in 3Q21. This is mainly attributable to higher energy cost, arising from quickening inflation.

Stable demand amid inflationary pressures.

  • Sheng Siong is expected to benefit from changes in consumer spending in the near term. As inflation takes toll and dents real earnings, consumers may no longer venture out for dining options and have greater interest in home cooking in order to lower expenditure. Consumer staples will likely be more attractive in the inflationary environment.
  • Additionally, in Singapore, Sheng Siong has increased senior citizen discount from 3% to 4% every Tuesday and Wednesday for 2H22, cushioning the impact of inflationary pressures and the rising cost of living for consumers. With affordability being a prime concern, an increase in patronage at the homegrown supermarket chain is expected.

China’s zero-COVID policy to improve profitability.

  • The tighter COVID-19 restrictions in China could lead to elevated demand. As cases in China continue to increase, cities across the country have implemented lockdown measures to curtail the outbreaks. With dining in at restaurants suspended and travel restrictions in place, we expect an increase in demand for household essentials. Sheng Siong’s four stores are likely to enjoy greater earnings during this period.

Sheng Siong – Earnings forecast revision & recommendation

  • No change to our earnings forecast.
  • Maintain BUY recommendation on Sheng Siong with a target price of S$1.91, pegged to 2023F P/E of 21x, or 5-year average mean P/E.
  • Catalyst:
    • Boosted demand arising from inflationary environment.
    • New store openings.

John Cheong UOB Kay Hian Research | Heidi Mo UOB Kay Hian | 2022-10-31

Read also UOB's most recent report:
2023-01-19 Sheng Siong Group - Staying Defensive Amid Inflation & GST Hike.

Price targets by 3 other brokers at Sheng Siong Target Prices.
Listing of research reports at Sheng Siong Analyst Reports.

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