Sheng Siong Group - CGS-CIMB Research 2021-07-30: Awaiting New Catalysts

SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - Awaiting New Catalysts

Singapore’s reversion to Phase 2 (Heightened Alert) since May boosted Sheng Siong’s 2Q21 results. Key positive was a record GPM of 28.9%.
While ongoing mobility restrictions point towards a strong 3Q, Singapore’s likely reopening (Sep onwards) could cause elevated demand to taper off.
Maintain HOLD on Sheng Siong; we believe the near-term elevated demand has been priced in. Target price unchanged at S$1.60 (22x CY22F P/E, 1 standard deviation above 5-year mean).

Sheng Siong (SGX:OV8) reported 2Q21 net profit of S$35.1m (+14% q-o-q, -24% y-o-y), which we deem as above expectations, as it boosted 1H21 net profit to 63% of our and 60% of Bloomberg consensus full-year estimates. The reversion to Phase 2 (Heightened Alert) since mid-May led to another round of elevated demand for groceries in Singapore, which led to the stronger 2Q performance on a sequential basis.
Key positive was a record GPM of 28.9% (+1.3% points q-o-q, +0.8% pt y-o-y), supported by
1. higher sales mix of fresh food, and
2. higher contribution from private label products.

Phase 2 (Heightened Alert) which will be in place till 18 Aug could point towards continued strong revenue base in 3Q21F. However, with two-thirds of Singapore’s population set to be fully vaccinated by 9 Aug, the country is set to reopen its economy in mid-Aug, as the government pivots to an endemic approach in dealing with the virus. This could cause home grocery expenses to normalise. We expect Sheng Siong’s revenue to expand 3.6% y-o-y in 3Q21F, before declining 2.8% y-o-y in 4Q21F.

Store opening remains slow in Singapore year-to-date, as construction delays restricted supply of new HDB shops. Sheng Siong has participated in the tenders of two; the outcome has yet to be announced. We currently forecast only one store addition in Singapore in FY21F, before its expansion returns to a more normalised pace of four new stores p.a. from FY22F.
Meanwhile, Sheng Siong aims to nurture growth in Kunming, China with two new stores this year, bringing its total store count there to four by year-end. While Sheng Siong’s China operation is profitable (0.6% profit contribution to group in FY20), we are cautious on this move, as China’s supermarket industry is facing rising pressure from grocery e-commerce players.

We lift our Sheng Siong's FY21F EPS by 13.8% to account for higher sales and GPM assumption, given the extension of mobility restrictions in Singapore. Nevertheless, we believe the near-term elevated demand has been priced in, and reiterate HOLD on Sheng Siong, as we see limited positive earnings catalysts in the near term.
Our target price for Sheng Siong is kept at S$1.60, still based on 22x CY22F P/E (1 standard deviation above its historical 5-year mean).
See
Upside risks include stronger-than-expected economy reopening and margin uplift.
Downside risks include intensifying competition from grocery shopping platforms.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.600 SAME 1.600