Sheng Siong Group - UOB Kay Hian 2021-08-03: 2Q21 Above Expectations; Demand To Taper Off In The Quarters Ahead

SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - 2Q21 Above Expectations; Demand To Taper Off In The Quarters Ahead

Sheng Siong’s 2Q21 net profit of S$35m (-24% y-o-y) was above expectations, with 1H21 forming 62% of our full-year estimates. 2Q21 fell 18% y-o-y given the high base in 2Q20 while gross margin expanded 0.8ppt from a better sales mix.
We expect demand to taper off in the coming quarters, as Singapore pivots from a pandemic to an endemic approach in dealing with COVID-19.
Maintain HOLD on Sheng Siong with a 1% lower target price of S$1.73 (23x 2022F P/E) as we roll over our valuation base year to 2022.

Sheng Siong Group (SGX:OV8) reported 2Q21 earnings of S$35.2m (-24% y-o-y). The 1H21 results account for 62% of our full-year estimates. The stronger-than-expected results were mainly due to the Phase 2 (Heightened Alert) implemented in early-May 21, which has led to a temporary rise in groceries demand.

Sheng Siong's revenue in 2Q21 fell 18% y-o-y to S$344m, given the high base in 2Q20 due to COVID-19-induced demand. On an annualised basis, revenue per square feet declined to S$2,467 in 2Q21, which fell sharply by 19% compared to 2Q21.
Gross margin rose 1.3ppt to 28.9% in 2Q21 from 27.6% in 2Q20. This came on the back of better input prices and sales mix, where higher-margin fresh products continue to enjoy better demand.

The pandemic has impacted the supply of new HDB shops amid tight measures taken in 2020 to curb the spread of COVID-19. In 2021, there were a total of two tenders of which the outcome has not been announced. Sheng Siong will continue to search for new retail spaces in areas where it will build a presence and to nurture the growth of its new stores and improve comparable same store sales.
Sheng Siong has also announced lease agreements for its third and fourth stores in China to nurture the growth of the supermarket operations in Kunming. The third store has a retail space of about 37,800sf and is expected to be operational by end-3Q21 while the fourth store has a retail space of about 30,772sf and is expected to be operational by end-4Q21.

Sheng Siong opened five new stores and closed one store in 2020, ending the year with 63 stores and a retail area of 571,150sf (+7.9% y-o-y) in Singapore. The group shared that it was not successful in its tenders for the two HDB commercial units (Block 115A Alkaff Crescent and Block 610 Tampines North Drive) submitted in Nov 20.
Given the disruption to the construction industry caused by the pandemic in 2020, it is likely that more new shops tenders would be released towards the end of 2021 and 2022 as HDB rushes to clear the backlog. Sheng Siong will continue to look for retail space in new and existing HDB housing estates, particularly in locations where the group has no presence.
Our forecast incorporates a 20,000sf increase in retail area for 2021, translating to 2-3 new store wins. 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 to capitalise on the stronger demand during COVID-19 and gain market share as it outperformed the Singapore supermarket index.

Sheng Siong expects the elevated demand for groceries induced by COVID-19 to taper off in 2H21, in line with the containment of the pandemic and the progressive rollout of vaccinations in Singapore. In view of the Phase 2 (Heightened Alert) imposed by the government from 22 July 2021 to 18 August 2021, it could result in a higher demand for grocery products as compared to the same period last year. However, as Singapore pivots from pandemic to an endemic approach in dealing with the virus and with the gradual easing of COVID-19-linked restrictions, the demand is likely to taper off in 2H21.
Going forward, there will also be comparatively less government grants as the pandemic situation stabilises with a higher vaccination rate.

We raised our 2021/22/23 earnings forecast for Sheng Siong by 13% / 3% /3% respectively. The substantial increase in 2021 came after we raised our revenue and margin assumption by 11% and 0.2ppt to 27.5%, respectively. This is to account for the Phase 2 (Heightened Alert) imposed by the government in early May and late July in 2021, which will result in a temporary increase in the demand for grocery products.

Maintain HOLD on Sheng Siong with a 1% lower target price of S$1.73, pegged to 2022F P/E of 23x, or 5-year average mean P/E. We roll over our valuation base year to 2022F and reduce our P/E multiple from 0.5 standard deviation above mean to capture the normalisation of future earnings as elevated demand for groceries starts to taper down in 2H21.
See
Previously, our valuation for Sheng Siong was based on 2021F P/E of 24.6x, or 0.5 standard deviation above SSG’s 5-year average mean P/E. On a valuation basis, we look for a more favourable entry price of S$1.50.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-03

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