Sheng Siong Group - DBS Research 2021-02-25: Robust Outlook As We Enter Normalisation Phase

SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - Robust Outlook As We Enter Normalisation Phase

Sheng Siong's 4Q20 earnings in line; lower than expected operating margins offset by government grants.
Slight dip in earnings in FY21F but expect demand to remain robust as Circuit Breaker Phase 3 is still in force.
Reduce Sheng Siong's FY21-22F earnings forecast by 7% each, on lower operating margin assumption.

Sheng Siong (SGX:OV8)s 4Q20 earnings of S$32.1m (+85% y-o-y) was within our estimate.
Revenue of S$319m (+29% y-o-y) was driven by elevated demand due to Circuit Breaker Phase 2 and safe distancing measures.
Operating profit was S$27m (+34% y-o-y), with operating margins higher at 8.4% (+0.3ppt) on better economies of scale led by the robust demand. However, operating margin was below our estimates on higher than expected admin expenses. This was offset by higher than expected government grants, which helped lift 4Q20 net profit to meet our earnings estimates.
A final dividend of S$0.03 was declared, bringing Sheng Siong's total dividend for FY20 to S$0.065 per share, representing a payout ratio of 71%.

Sales growth continued to be strong, with same-store-sales growth (SSSG) at 18.2% for the quarter (29.1% for FY20). SSSG was exceptionally strong as Singapore remained in Phase 2 of the Circuit for most of 4Q20.
Singapore retail sales for supermarkets registered sales growth of 22.3%/22.6%/25.3% for the months of October to December 2020. Along with new stores, Sheng Siong’s 4Q20 sales grew 29% y-o-y, outperforming the industry. Sales per square feet reached S$2,221, +13% y-o-y, but normalising at -6% q-o-q as Singapore gradually opened up and moved into Phase 3 of the Circuit Breaker.

We were anticipating margin expansion due to better economies of scale. However, operating margins were below expectations led by higher than anticipated admin expenses in the form of staff costs. There was higher headcount, bonus provision and staff salary allowances. Despite higher staff costs, Sheng Siong's admin expenses remained in line with previous years at 17-18% of sales.

Government grants amounted to S$9.4m in 4Q20. Hence, other non-operating expenses/income was above our expectations.
Going forward, government grants recognition will decline as supermarket operators are no longer entitled to the Jobs Support Scheme extension under the new budget 2021 support measures.

In line with lower than expected operating margins, we are trimming our operating margin projections for Sheng Siong from 10% to 9%. This is to account for lower than expected economies of scale and margin uplift. Besides, as Singapore moves into Phase 3, we anticipate lower demand as food consumption shifts to F&B Foodservice.
We have reflected normalising demand trend in our estimates.

We continue to like Sheng Siong for its stable earnings, cash generating abilities, and as a beneficiary of the Circuit Breaker Phase 3. As Singapore has yet to fully open up, we expect supermarket sales to remain robust, albeit lower than FY20. Despite lowering our earnings estimates and target price, Sheng Siong still offers 13% upside.
See Sheng Siong Share Price; Sheng Siong Target Price; Sheng Siong Analyst Reports; Sheng Siong Dividend History; Sheng Siong Announcements; Sheng Siong Latest News.
We maintain our BUY recommendation on Sheng Siong with target price of S$1.77 pegged to 25x FY21F PE.

Alfie YEO DBS Group Research | https://www.dbsvickers.com/ 2021-02-25

SGX Stock Analyst Report BUY MAINTAIN BUY 1.77 DOWN 1.900