Sheng Siong Group - RHB Invest 2022-08-01: Solid Defensive Play Against Inflation; BUY

SHENG SIONG GROUP LTD (SGX:OV8)

Sheng Siong Group - Solid Defensive Play Against Inflation; BUY

Sheng Siong (SGX:OV8) reported a resilient 1H22, with NPAT rising 2.1% y-o-y to S$67.5m despite the economic reopening. Gross profit margin (GPM) also improved to 29.4% from 28.2% despite rising inflation, substantiating its track record of maintaining margins in the face of rising costs.

We believe inflation will cause consumers to be more cautious on spending, forcing them to focus on essentials and house brands, and/or cook at home more frequently, which should benefit Sheng Siong.
Maintain BUY rating on Sheng Siong with S$1.78 target price, 11% upside and ~4% yield.

Despite revenue sliding slightly by 0.7% y-o-y to S$676.8m, mainly due to the June holidays – which led to an increase in travelling activities – gross profit margin (GPM) rose to 29.4% from 28.2%, while net profit margin (NPM) rose to 10% y-o-y from 9.7%. This was on the back of surging inflation across the board on utilities, cost of goods and services (COGS), and manpower. This proves that Sheng Siong is able to raise prices and pass on costs to consumers, and that the company can maintain its margins, unlike many other types of businesses, in our view.
Sheng Siong has also always been known as the “value” supermarket, and we expect some consumers to downgrade and switch to shopping at Sheng Siong as disposable income declines due to rising inflation. There is also an increasing trend of consumers switching to house brands for affordable value – this is beneficial for Sheng Siong, as it earns higher margins from house brands.

Sheng Siong declared an interim dividend of S$0.0315 per share in 1H22, an increase from S$0.0310 for 1H21. 2H will likely be even better for Sheng Siong, and we expect a yield of 4.1% for FY22F.

We expect the rise in inflation and recessionary fears to be positive for Sheng Siong, as it should help mitigate any dampener stemming from Singapore’s border and economic reopening. We expect Sheng Siong to also be able to maintain margins and pass on costs to its customers, as it has previously done in the past – and proven as of 1H22. This counter presents a solid defensive option, especially in such volatile market conditions.
Using our in-house ESG methodology, we derived an ESG score of 3 out of 4 for Sheng Siong – which is on par with the median score of our Singapore coverage universe. As such, we apply a 0% ESG discount/premium to our target price.
See
Key downside risks: A price war, and a surge in operating costs.

Jarick Seet RHB Securities Research | https://www.rhbgroup.com/ 2022-08-01

SGX Stock Analyst Report BUY MAINTAIN BUY 1.780 SAME 1.780