Sheng Siong Group - RHB Invest 2020-03-18: Impact From Malaysia’s Movement Control Order


Sheng Siong Group - Impact From Malaysia’s Movement Control Order

  • Sheng Siong's share price has fallen 28% from its peak. We note that over the shorter term, there are still some downside risks as Sheng Siong's share price could continue to trend down along with the sell-down in the market. But in the longer term, Sheng Siong (SGX:OV8)’s fundamentals are still intact as food staples demand remains fairly resilient.
  • Barring any prolonged lockdown in regional countries, we do not foresee any major impact on earnings.

What’s new?

  • On Monday, Malaysia announced it would enforce movement control measures from 18-31 Mar. This led to some panic buying at grocery retail stores in Singapore due to worries of food supply.

Our views.

  • We think the news is positive to the group in the short run as the panic buying behaviour would give a one-off boost to sales. Given Malaysia’s movement control order only lasts for two weeks, we do not see major disruptions in the supply chain as Sheng Siong has increased its days in inventory and diversify its suppliers in anticipation of such situations.

Fresh items most impacted if Malaysia’s movement control order prolongs.

  • Majority of the poultry and vegetables are imported from Malaysia. Approximately 45% of Sheng Siong’s annual sales is derived from fresh produce. As such, we estimate c.10-15% of sales would be attributed to poultry and vegetables imported from Malaysia.
  • However, the impact to the group’s sales and earnings are less clear as consumers are likely to substitute these shortfalls with other food alternatives which could be higher margin products (eg seafood, beef, pork) or lower margin products (eg frozen chicken, canned food). We estimate the impact on sales would be at a high single digit in the worst case scenario of the prolonged border control in Malaysia.

Non-fresh items are less impacted.

  • We believe non-fresh items are less likely to be impacted. As these items are less or non-perishable, both Sheng Siong and the suppliers are likely to carry additional stock supplies in their inventories to cope with the temporary disruption. Major suppliers are likely to direct more productions to other geographies if Malaysia’s movement control order prolongs.

Sheng Siong remains a Top Pick in our sector.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-18
SGX Stock Analyst Report BUY MAINTAIN BUY 1.420 SAME 1.420