Sheng Siong Group - RHB Invest 2022-05-24: Beneficiary Of Rising Inflation; Upgrade To BUY

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SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - Beneficiary Of Rising Inflation; Upgrade To BUY

• Sheng Siong (SGX:OV8) has proven that it can maintain margins under the circumstances of rising prices. Also, after the euphoria related to the re-opening of borders and the Singaporean economy is over, we expect consumer expenditure levels to tone down, while home cooking activities pick up to normal levels again.
• Sheng Siong, well-positioned as a value-for-money supermarket chain, will be a key beneficiary of this normalisation. Upgrade to BUY from Neutral, new S$1.78 target price from S$1.51, 17% upside with ~4% FY22F yield.

Inflation pressures may outweigh euphoria related to the economic reopening.

• We believe that inflation will likely outweigh the negative impact of the economic reopening, as reality is apt to sink in once the euphoria related to travel and the reopening of F&B and leisure outlets is over. Thereafter, more people are likely to stay home and have more home-cooked meals, which is a more economical option.
• In addition, Sheng Siong will likely be able to raise prices to pass on costs while preserving margins – something it has achieved in the past when prices rose. In fact, this might turn out to be a net positive for the company, as the increase in the cost per item will lead to a larger net spend per customer. As such, Sheng Siong may maintain its gross profit margin, while widening its net profit margin, looking ahead.

To open 3-5 new stores per year over the next 3-5 years.

• For the past 2 years, Sheng Siong has seen the supply of new Housing and Development Board commercial space being affected for various reasons – although this is expected to improve gradually. In 2021, Sheng Siong secured leases for three stores.
• Sheng Siong's management aims to open 3-5 new stores per year for the next 3-5 years, focusing in areas where it does not have a presence.

Beneficiary of rising inflation; now a BUY.

• We expect the rise in inflation to be a positive for Sheng Siong, which will help to mitigate any target price.
• Key downside risks: A price war, and a surge in operating costs.
• See
  • Sheng Siong's Share Price,
  • Sheng Siong's Target Price,
  • Sheng Siong's Analyst Reports,
  • Sheng Siong's Dividend History,
  • Sheng Siong's Announcements,
  • Sheng Siong's Latest News.

Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2022-05-24

SGX Stock Analyst Report B UPGRADE NEUTRAL 1.78 UP 1.510