Sheng Siong Group - UOB Kay Hian 2020-04-30: 1Q20 Sales Soar Amid Elevated Demand Due To COVID-19 Outbreak


Sheng Siong Group - 1Q20 Sales Soar Amid Elevated Demand Due To COVID-19 Outbreak

  • Sheng Siong's 1Q20 net profit of S$28.7m (+48% y-o-y) was above expectations, forming 33% of our full-year forecasts. The growth was mainly driven by exceptional sales which surged 30.7% y-o-y on the back of increased demand since the DORSCON level was raised to orange. In light of the circuit breaker, we expect the current elevated level of demand to remain in 2Q20 before tapering off in 2H20.
  • We raise our 2020F earnings by 14%. Maintain HOLD with a higher PE-based target price of S$1.50.
  • Entry price: S$1.35.

Sheng Siong's 1Q20 results exceeded expectations.

  • Sheng Siong (SGX:OV8)’s results were above our expectation with 1Q20 forming 33% of our full-year forecasts. The exceptionally strong quarter came as revenue surged 30.7% y-o-y. Chinese New Year sales were stronger compared with 2019 as consumer sentiment improved.
  • More importantly, management shared that the change in the DORSCON level to orange triggered the first round of panic buying and demand has since remained elevated as eat-at-home demand has increased. Same-store sales (SSS) contributed to 19.7% of revenue growth while new stores contributed 9.0%.

Higher gross margin, government grants and operating leverage improvement further boosted sales.

  • The 0.9ppt increase in gross profit margin to 27% in 1Q20 was mainly driven by the rise in house-brand sales, which command a higher margin. Additionally, input price was lower in 1Q20 due diversified sourcing of non fresh products to cope with the sudden surge in demand.
  • Further, government grants increased by S$1.3m, mainly from Wage Credit, Special Employment Credit schemes and rental waivers announced in Budget 2020. Improvement in operating leverage also lifted earnings with EBIT (excluding increase in government grants) rising by 1.0ppt to 10.3%.

Demand likely to remain elevated in 2Q20 amid the circuit breaker measures before tapering off in 2H20

  • The circuit breaker measures have sparked another round of panic buying. Additionally, as residents stay indoors and work-from-home measures are in place, we expect the spending shift towards buying groceries to cook at home over F&B service to continue going into 2Q20.
  • Sales are likely to taper off from the current elevated levels in 2H20 once the circuit breaker that is scheduled to end on 1 Jun 20 is lifted. Further, demand for non fresh product could reduce once the COVID-19 situation stabilises as buffer stocks kept by households are consumed.

Additional stores secured.

  • Sheng Siong has secured two new HDB stores. These are located at Tampines Street (8,490 sf) and Sengkang West Avenue (9,040 sf). Our online checks show that tendered rent for these outlets came in at a reasonable rate of approximately S$7 psf. In addition, Sheng Siong also won a tender for a shop in the Potong Pasir Community Club (4,610 sf).
  • Due to the COVID-19 outbreak, timeline of the openings are uncertain as executions of the lease agreements and store fittings can only be carried out after the circuit breaker measures are lifted. Taking into account the additional stores secured, Sheng Siong would open a total of five shops in 2020, bringing its store count to 64 with a retail area of 575,160 sf.

Earnings Revision

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.50 UP 1.320