Sheng Siong Group - DBS Research 2020-07-30: Record Quarter Thanks To Circuit Breaker


Sheng Siong Group - Record Quarter Thanks To Circuit Breaker

  • Record quarter for 2Q20 driven by Circuit Breaker.
  • Interim DPS of 3.5 Scts declared.
  • Raise Sheng Siong's FY20-21F earnings by 15-35%.
  • Maintain BUY with higher Target Price of S$1.91.

Maintain BUY on Sheng Siong for 11% potential upside.

  • We raised our Sheng Siong Group (SGX:OV8)'s FY20-21F earnings forecast by 15-35% due to stronger than expected 2Q20 earnings led by the Circuit Breaker. The full impact of the Circuit Breaker is reflected in this set of 2Q20 results. We have assumed a reasonable tapering of earnings in 2H20, followed by some moderation of sales in FY21F.
  • As the Circuit Breaker restrictions ease, those cautious will continue to stay home, supporting sales going forward post Circuit breaker. Nonetheless, we have raised FY21F earnings due to a higher store count and better gross margins.
  • Sheng Siong is a direct beneficiary of Singapore supermarket sales in addition to is defensive qualities of strong balance sheet and cashflow generation capabilities.

Record profit for 2Q20 due to Circuit Breaker

  • Sheng Siong's revenue and earnings of S$419m and S$46.1m in 2Q20 were above expectations. Revenue jumped 75.8% y-o-y due to the Circuit Breaker which was in place from 7 April till 19 June. As a result, Sheng Siong was a beneficiary of almost everybody staying home.
  • Same Store Sales Growth (SSSG) grew by 13% y-o-y, with annualised sales per square feet reaching over S$3,000 compared with a normalised level of S$2,000. Gross margin was at a record high of 28.1% (+0.7ppt) led by better sales mix from higher sales of fresh food, house brands and diversification of food sources.
  • Operating margins increased to 11.5% (+2.0ppts) as a result.
  • An interim dividend of 3.5 Scts was declared, equivalent to 70% payout ratio for 1H20.

Robust Singapore Retail sales for Supermarkets:

  • Grocery sales was strong during the Circuit Breaker, with Singapore retail sales for supermarkets growing by 74.6% and 56.1% y-o-y in April and May, outperforming overall retail sales decline of 41% and 52% for the same period.

Slow recovery from COVID-19 anticipated, moderate drop in sales:

  • We assume a scenario where safe distancing is still practiced and mass gatherings and dining in big crowds are still prohibited. Based on this, consumers would still cook at home, supporting demand and delaying a drop in supermarket sales growth.
  • For outlet openings, Sheng Siong will open three more new stores in 2H20 at Potong Pasir, Sengkang West and Tampines St 86, bringing total store count to 64 by the end of the year. With more outlets in operation, the sales moderation in FY21F would be minimised.

Raise Sheng Siong's earnings forecast by 15-35%.

  • We raised our FY20-21F earnings forecast by 15-35%, taking into account better than expected 2Q20 results. This assumes margin expansion and higher store count that Sheng Siong would be adding to its store network this year.
  • We have forecast FY21F earnings to record a slight decline as we believe that the absence of Circuit Breaker next year would lead to lower earnings.

Maintain BUY with higher S$1.91 Target Price as a result of our earnings revision.

Alfie YEO DBS Group Research | Andy SIM DBS Research | https://www.dbsvickers.com/ 2020-07-30
SGX Stock Analyst Report BUY MAINTAIN BUY 1.91 UP 1.660