SHENG SIONG GROUP LTD (SGX:OV8)
Sheng Siong Group - Sales Normalising, But With Exceptional Margins
- Sheng Siong (SGX:OV8)'s 1H22 PATMI beat expectations at 59% of our FY22 forecast. Gross margins surprised on the upside, a record 30.2% in 2Q22 (2Q21: 28.8%).
- Revenue is beginning to contract with the relaxation of social and work restrictions. Grocery demand will soften with less home dining post-pandemic. A 5% net increase in store footprint will be supportive of revenue in 2H22.
- We are lifting our FY22e earnings by 6%, from higher gross margins. Our BUY recommendation on Sheng Siong is maintained. The target price is lifted from S$1.75 to S$1.86, due to higher earnings.
The Positives
Record gross margins, again.
- Despite rising food inflation, Sheng Siong has managed to raise gross margins due to a higher sales mix of fresh food sales.
- Sheng Siong’s competitive edge or pricing in fresh food stems from direct sourcing from overseas exporters, ability to reduce wastage from repackaging and repricing, value add from fresh food specialists and tactical purchasing due to seasonality or dislocation in the supply chain.
Store expansion resumes.
- No change in management guidance of opening 3 to 5 new stores per year over the next three to five years. There will be three new stores opened this year.
- 1H22 saw the opening of two stores (April, May) of 20k sft. Another new store in Margaret Drive will be opening in August. However, the net increase in footprint in 2H22 will be only around 5k sft, including the closure of a store on a private lease. There are four stores currently at the bidding stage.
The Negative
Same-store sales contracted.
- Same-store sales fell 5% y-o-y in 2Q22. It is the first such decline since 3Q19. We expect the contraction to continue into 2H22.
Outlook
- A transition year is underway for Sheng Siong as grocery demand normalises from less dining at home. New stores, rising market share and improving gross margin will help mitigate some of the decline in sales. With only 66 stores, there is a runway for Sheng Siong to double the footprint as the largest competitor in Singapore has around 200 stores.
Maintain BUY call on Sheng Siong with a higher target price of S$1.86 (previously S$1.75)
- Valuation is pegged to 23x P/E, a 10% discount to the 5-year historical average of 25x P/E. We expect Sheng Siong's revenue to normalise in FY22e/FY23e, placing downward pressure on growth. New store openings of three to five per year, rising market share and improving gross margins will help stem part of the earnings decline.
- See
- Sheng Siong’s attractive financial metrics include ROEs of 27%, dividend yields at 3.9% and net cash at S$234mil (as at Jun 2022).
Paul Chew
Phillip Securities Research
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https://www.stocksbnb.com/
2022-07-31
SGX Stock
Analyst Report
1.86
UP
1.750
