Sheng Siong Group - UOB Kay Hian 2021-11-01: 3Q21 Above Expectations; Demand Likely To Moderate In 2022

SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - 3Q21 Above Expectations; Demand Likely To Moderate In 2022

Sheng Siong’s 3Q21 net profit of S$34m (+8.2% y-o-y) was above expectations, with 9M21 forming 84% of our full-year estimates. 3Q21 revenue grew 6.4 y-o-y given tighter COVID-19 restrictions while gross margin jumped 2ppt to record levels of 29% on a better sales mix.
We expect demand to taper off in the coming quarters, as Singapore pivots from treating COVID-19 as a pandemic to an endemic. Maintain HOLD rating on Sheng Siong with 9% lower target price (21x 2022F PE) as we lower our P/E multiple.

Sheng Siong (SGX:OV8) reported 3Q21 earnings of S$34.4m (+8.2% y-o-y, -2.4% q-o-q). The 9M21 results account for 84% of our full-year estimates. The stronger-than-expected results were mainly due to the tighter restrictions implemented by the government in response to the high number of COVID-19 community cases. In addition, the temporary closure of wet markets due to a spike in cases in Jurong Fishery Port and Pasir Panjang Wholesale Centre also helped boost demand in supermarkets.
Record-high gross margin and higher revenue resulting from tighter COVID-19 restrictions. Revenue in 3Q21 rose 6.4% y-o-y to S$348m, from COVID-19-induced demand. The strong revenue performance was attributable to new stores growth of 3.2%, same-store-sales growth of 2.8% and growth from China at 0.4%. On a y-o-y basis, gross profit margin jumped 2ppt to 29%, up from 27% in 2Q20, reaching record levels. The higher gross profit margin was largely due to improved sales mix of products with higher margins.
Continued expansion in China. Sheng Siong opened a third store in Kunming, China in late- August and expects to open a fourth store by end-21 as the group looks to nurture the growth of its supermarket operations in Kunming. The third store has a retail space of about 37,800sf while the fourth store has a retail space of about 30,772sf. While its operations in China are small at around 2% of the group’s total revenue, it continues to be profitable.

New store openings outlook. Sheng Siong opened five new COVID-19 restrictions in Sep-Nov 21 could lead to elevated demand for another quarter. However, as Singapore pivots to treating COVID-19 as a pandemic to an endemic, gradual easing of COVID-19-linked restrictions and as the vaccinated travel lane extends to more countries, the demand should taper off going in 2022.

We raise our 2021 earnings forecast for Sheng Siong by 9% while 2022 and 2023 earnings forecasts remain largely a valuation basis, we look for a more favourable entry price of S$1.35.
See
Share price catalysts:
- Higher-than-expected new-store openings and same-store sales growth.
- Higher dividends.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-11-01

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.58 DOWN 1.730