SHENG SIONG GROUP LTD (SGX:OV8)
Sheng Siong - Inflation-Induced Demand To Offset Moderation In COVID-19 Demand
- We believe Sheng Siong Group (SGX:OV8) should continue to enjoy healthy demand for groceries as rising inflation will push more consumers to dine in at home. This should offset the reduced demand from the easing of COVID-19 restrictions.
- Sheng Siong’s ability to grow its gross margin consistently is good evidence of its ability to pass on rising costs and a better product mix. We raised our 2022-24 EPS forecast for Sheng Siong by 4%. Upgrade Sheng Siong to BUY after rolling over our valuation base year to 2023.
Inflation pushing more consumers to dine in at home.
- Despite the tapering off of demand from the easing of COVID-19 restrictions, we believe Sheng Siong Group should continue to enjoy healthy groceries’ demand.
- On the back of inflationary pressures, consumers are increasingly concerned with the higher cost of living, and may choose to dine in more at home to reduce excessive spending. This may continue to support groceries’ demand at the supermarkets.
Steadily growing gross margin a strong testament to ability to pass on costs.
- Sheng Siong Group’s steadily growing gross margin is a good evidence of its ability to pass on rising costs. We believe that given the consumer staples nature of Sheng Siong Group’s products, it will likely be able to raise prices quickly to pass on costs and preserve margins.
- In addition, the demand for higher margin fresh products should continue to grow as these are the main products required for cooking at home.
- All in all, the increase in item costs coupled with the ability to maintain gross margin should translate into higher earnings moving forward. To recap, Sheng Siong Group’s 1Q22 gross profit margin improved by 1.0ppt to 28.7% due to a favourable sales mix.
Supermarket industry’s retail sales continued to record m-o-m growth in May 22.
- According to the latest retails sales index published by Singstat on 5 Jul 22, the supermarkets’ and hypermarkets’ retail sales continued to record a 0.6% m-o-m growth. The m-o-m growth is noteworthy as this is achieved amid a major relaxation of Singapore’s COVID-19 public health measures, which took effect from 26 Apr 22 where there will no longer be a group size limit for mask-off activities and safe distancing requirement.
- Although the growth is marginal vs the 10.3% decline y-o-y, we note that the y-o-y data is not an accurate comparison as in May 21, the group size for dining-in was capped at five and eight persons in the first two weeks respectively and dining-in was suspended from 16 May 21 as part of the Phase 2 Heightened Alert measures. However, in May 22, there were no dine-in restrictions for vaccinated persons.
New store opening outlook.
- For the past two years, Sheng Siong Group has seen the supply of new HDB can provide customers better accessibility to its products.
Sheng Siong Group - Earnings forecast revision & recommendation
- We raise our 2022-24 earnings forecast for Sheng Siong Group by 4% after raising valuation base year from 2022 to 2023.
- See
- Catalysts:
- Higher-than-expected new store openings and same-store sales growth.
- Higher dividends.
John Cheong
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-07-13
SGX Stock
Analyst Report
1.91
UP
1.690
