Sheng Siong Group - DBS Research 2021-08-02: Preferred Grocery Pick As Consumers Favour Value


Sheng Siong Group - Preferred Grocery Pick As Consumers Favour Value

  • Sheng Siong's 2Q21 gross profit margin soars to 28.9% despite high base in 2Q20.
  • Move to Phase 2 (Heightened Alert) could give a boost to 3Q21 earnings.
  • Opening of 2 new stores in Kunming to bring total China store count to 4 by end-2021.
  • Maintain BUY with unchanged target price of S$1.77.

Healthy 1H21 net profit of S$66.1m provides cushion for expected demand normalisation in 2H21.

  • Sheng Siong (SGX:OV8)'s 1H21 net profit of S$66.1m formed ~62% of our forecast. While 1H21 revenue and net profit declined to S$681.7m (-8.8% y-o-y) and S$66.1m (-12.1% y-o-y), this was expected when compared to the high base in 1H20 that saw elevated demand stemming from the Circuit Breaker.
  • On a positive note, gross profit margin for 1H21 improved 0.6ppt y-o-y despite the high base, due to a change in sales mix, while operating profit declined as government grants tapered off. Sales per square foot also increased q-o-q in 2Q21, likely due to higher revenue as Singapore moved to Phase 2 (Heightened Alert) from 16 May – 13 June.

China subsidiary remains profitable.

  • Sheng Siong’s Chinese subsidiary, which operated 2 stores in 1H21, continued to be profitable. No further details were disclosed but the Group has recently leased two new stores in China. The 3rd store is expected to be operational by end-3Q21 and is a ~37,800 sqft unit in Haiyuan District, Kunming. The 4th store is a 30,772 sq ft unit located in Guandu District, Kunming and expected to be operational by end-4Q21.
  • Sheng Siong is hence expected to have 4 stores in China by the end of 2021 and is a step towards progressively creating economies of scale.

1H21 performance likely boosted by shift to Phase 2 (Heightened Alert) in May.

  • The shift to Phase 2 (Heightened Alert) from 16 May – 13 June resulted in work-from-home being the default mode. We believe this had a positive impact on grocery sales and in turn Sheng Siong’s revenue. That said, the fact that Sheng Siong managed to boost gross margins by 0.8 ppt y-o-y despite the high base in 2020 shows that the Group is not resting on its laurels.

3Q21 numbers may resemble 2Q21.

  • As COVID-19 cases remain elevated, Singapore has returned to Phase 2 (Heightened Alert) from 22 July – 18 August which we believe could similarly boost grocery sales. The outcome of two tenders for HDB shops for use as supermarkets is yet to be announced.
  • Given the roughly similar period of restrictions and muted store growth, Sheng Siong's 3Q21 performance may very much resemble 2Q21 although demand could normalize in September if vaccination goals are achieved. An extension of the restrictions will represent upside from our numbers.

Hong Kong may offer glimpse of normalising grocery demand.

  • Hong Kong shares similar demographics to Singapore and has enjoyed an extended period of relaxed restrictions as the pandemic situation stabilised. As such, supermarket sales in Hong Kong could provide a glimpse of normalization trend in supermarket sales. Supermarket sales in the 3 months from March 2021 (which coincides with when restrictions were progressively relaxed) were down ~15% from peak demand recorded in the 3 months from July 2020. This forms a basis for our estimate of sales per square foot in FY22F for Sheng Siong.

Maintain BUY on Sheng Siong with a target price of S$1.77.

  • We revised up Sheng Siong's FY21F earnings by 8% to account for the latest set of restrictions from July – August that will likely boost demand for groceries. We also roll forward our valuation basis to FY22F and peg it to the regional peer mean of 24x P/E. Overall, while demand normalization for groceries is expected as COVID-19 turns endemic, we think Sheng Siong is poised to ride on a shift in consumption patterns focusing on value.
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  • Numerous reports have found that the economic toll from COVID-19 has led to a flight to value amongst consumers and we believe this is positive for Sheng Siong as the brand resonates with the value proposition in Singapore. As such, we have projected for sales psf to remain ~17% above pre-COVID levels in FY23F even as demand normalizes which could translate to more profitable store expansions in future.

Woon Bing Yong DBS Group Research | https://www.dbsvickers.com/ 2021-08-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.770 SAME 1.770