Sheng Siong - Attractive Entry Point As Growth Resumes; Upgrade To BUY

Sheng Siong - DBS Research 2023-06-19: Attractive Entry Point As Growth Resumes; Upgrade To BUY

SGinvestors.io

Published: 2023-06-26 04:52 PM

Sheng Siong (SGX:OV8)

We upgrade our HOLD recommendation to BUY on Sheng Siong (SGX:OV8) with unchanged target price of S$1.89. Our upgrade is on the back of attractive industry dynamics and reasonable valuation.
In our recent post 1Q23 business update Sheng Siong - No Surprises Here; Wait For Better Entry Points, we downgraded the stock to a HOLD given that Sheng Siong's share price had appreciated rapidly and we saw limited upside. We believe this share price appreciation was likely a result of flight to safety with uncertainties over the global economy.
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- Read this at SGinvestors.io -
Based on our analysis of the upcoming 6 stores up for tender that will close by year-end, we noted that these locations generally have low competition nearby. We believe these new locations are attractive growth opportunities, which will deliver revenue per square foot on par with existing stores upon full ramp up.
Assuming an average S$2,200 revenue/sqft and 9% net margin, the annualized revenue and net profit projections for the 6 locations up for tender is S$14m and S$1.3m on average per store upon full ramp-up (estimate 6-12 months). Based on the new store opening guidance of 3 to 5 stores per annum, we expect Sheng Siong to deliver on average between S$3.8m to S$6.4m incremental net profit per annum from new stores.
In terms of costs, we expect to see significant decline in utility cost in FY24F. Given the continued decline in natural gas prices (key input cost of electricity in Singapore, which has 1 quarter cost pass through lag effect), we believe Sheng Siong is well-positioned to recontract at much lower rates when its utility contract expires at end-2023. Assuming natural gas prices stay at current levels, we estimate that Sheng Siong can enjoy ~ S$8m in cost savings in FY24F (which we have factored in our forecast).
Overall, with the above estimates in mind, we believe our FY24 forecast for Sheng Siong which assumes S$9m bottom-line growth in FY24F is an achievable one.