Sheng Siong Group - UOB Kay Hian 2020-08-03: 2Q20 Expect COVID-19 Tailwinds To Persist; Upgrade To BUY


Sheng Siong Group - 2Q20 Expect COVID-19 Tailwinds To Persist; Upgrade To BUY

  • Sheng Siong Group's 2Q20 net profit of S$46m was above expectations, with 1H20 earnings forming 76%/77% of our/consensus 2020 forecasts. The growth was led by exceptional sales and higher gross margins on the back of elevated demand due to the implementation of the circuit breaker.
  • Although we do expect demand to moderate from the easing of circuit breaker measures, it is likely to be gradual. We raise our 2020 earnings forecast by 22%.
  • Upgrade Sheng Siong to BUY with a higher PE-based target price of S$1.95.

Sheng Siong Group's 2Q20 results exceeded expectations.

Strong demand from implementation of circuit breaker measures.

  • The record quarter came as revenue surged 75.8% y-o-y, driven by elevated demand as the implementation of the circuit breaker sparked another round of panic buying and consumers also shifted spending towards buying groceries over using F&B services as residents stayed indoors and with work-home-measures in place. This led to higher revenue psf at S$1,325, 37% higher compared to 1H19.
  • Same-store sales (SSS) contributed to the bulk of the revenue growth at 61.2% while new stores contributed 13.3%.

Record gross margin.

  • Gross profit margin reached a record 28.1% in 2Q20, 0.7ppt higher compared to 27.4% in 2Q19. Management noted this was largely a result of higher selling prices as fewer promotions were carried out given the strong demand while input prices were generally stable.
  • In addition, there was also a slight improvement in sales mix towards a higher proportion of fresh products.

Earnings further boosted by improvement in operating leverage.

  • The higher revenue also brought about an improvement in operating leverage with administrative expense as a percentage of sales decreasing to 15.7% in 2Q20 from 17.9% in 2Q19 and 16.5% in 1Q20.
  • Sheng Siong also recorded higher other income mainly due to a S$5.5m increase in government grants received compared to the previous year, consisting mainly of rental rebates for its HDB outlets as announced in the Budget Supplementary Packages. Excluding the government grants in other income, EBIT rose by 2.4ppt to 11.8%.
  • The Job Support Scheme grants from the government were largely allocated to reward all staff (except directors) with an additional month of salary in 2Q20 thus leading to a neutral impact on profits.
  • We also highlight that while Sheng Siong is in a net cash position, the company drew down S$30m of loans from a S$50m three-year term loan that was extended from a government agency in support of a national programme.

Proposed interim dividend of 3.5 S cents per share.

  • In line with the improvement in performance, Sheng Siong proposed a higher interim dividend of 3.5 S cents per share, up from 1.75 S cents per share in 2Q19. This is equivalent to a dividend payout ratio of 70% for 1H20, unchanged from 1H19. See Sheng Siong Dividend History.

Elevated demand should ease in 2H20 but likely to be gradual.

  • Given that the bulk of the government grants were received in 2Q20 and the circuit breaker measures in April to mid-Jun 20 led to exceptionally strong revenue, we reckon that Sheng Siong's earnings reached a peak level in 2Q20, barring another round of strict circuit breaker measures. That being said, the moderation of demand for groceries should be gradual as many companies continue to implement work-from-home measures and residents may remain cautious with regard to dining out.
  • Overall, we expect earnings to normalise back to a lower level, with 2021 earnings reducing by 17% y-o-y.
  • According to Google’s COVID-19 mobility report, the movement of people to workplaces as of 25 Jul 20 is 13% lower compared with the first month of the year, vs +15% for places of residence and +4% for supermarkets and pharmacies. This suggests that the end of the circuit breaker measures has not led to a complete normalisation of activities, and consumers’ consumption shift to eating at home vs dining out could continue to support supermarket sales going into 2H20, in our view.

New Sheng Siong store openings.

  • The Sengkang West Avenue outlet was opened in Jul 20 while the openings of the other two outlets are expected to be in 3Q20. We understand that the bidding of HDB commercial units has been put on hold thus far due to COVID-19, therefore further store openings apart from the ones secured in 1H20 are likely to take place in 2021.
  • Taking into account the two store openings in Jan 20, Sheng Siong would open a total of five shops in 2020, bringing its store count to 64 with a retail area of 571,920 sf (+8.0% y-o-y). Sheng Siong’s strategy of opening new stores, especially in the past two years (10 in 2018 and 5 in 2019), is timely and has helped the group gain market share and capitalise on the stronger demand during COVID-19.

Sheng Siong Group - Valuation & Recommendation

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-03
SGX Stock Analyst Report BUY UPGRADE HOLD 1.95 UP 1.500