Sheng Siong shareholders press for details on capital allocation, M& A opportunities

 

SHAREHOLDERS of supermarket chain Sheng Siong : OV8 0% have asked the company for, among other things, more details on its view on mergers and acquisitions (M& A) and its capital allocation priorities, given that it has S$324 million in cash on hand. 

 

These were among the list of queries the company had received from its shareholders ahead of its annual general meeting. Sheng Siong on Friday (Apr 19) posted a list of these questions and its responses in a filing to the Singapore bourse. 

 

A shareholder expressed concern that the company, with S$324 million in cash on hand as at end-December last year, might not be using these finances as efficiently as possible, especially since the company' s working capital requirements appear to be " much less" . 

 

The shareholder asked the company what its " main capital allocation priorities" are, and whether the group is looking at the likes of new geographies or " more aggressive bids for heartland spaces" . 

 

In its response, Sheng Siong said it was " reserving cash as its war chest for various opportunities" , such as the potential acquisition of new stores, warehouse space, and investments in technology to drive operational efficiency. 

 

" By allocating these funds strategically, the group can position itself to take advantage of emerging opportunities and further expand its operations," it added. 

Another shareholder noted that Sheng Siong has kept mum about M& A opportunities, and asked the company why it has not actively pursued the acquisitions of smaller supermarkets. 

 

Sheng Siong said that while it remains open to M& A opportunities to drive growth, the decision to pursue them depends on " careful analysis" of benefits and risks such as growth potential, cultural differences, and acquisition costs.

 

" It takes time to nurture these opportunities, and we think it is more strategic that Sheng Siong focuses more on organic growth &ndash expanding our network of stores, improving customer service, and exploring ways to attract new customers," the company said. 

 

Shareholders also asked about Sheng Siong' s growing profit margin, and whether this could be sustained. 

 

The company said its higher gross profit margin was attained by a combination of its attempts to continually improve the sales mix and drive supply chain efficiency, as well as its efforts to address rising staff costs and utility expenses in a high inflationary environment.

 

" While the group remains committed to driving efficiency gains, we will continue to ensure that our products are competitively priced and affordable," it added. 

 

In response to a query on its core strategy seeming to target heartland malls rather than bigger ones, and how it differentiates itself from its competitors, Sheng Siong said it competes in terms of " service, price and quality" . 

 

The group said that it also works on supply chain diversification, adopting new technologies and streamlining its operations &ndash all of which result in greater efficiency and cost-savings, which are then passed on to customers and shareholders. 

 

The research team at OCBC Investment Research is keeping its &ldquo buy&rdquo recommendation on supermarket operator Sheng Siong Group with a lower target price of $1.88 from $1.92 previously.

 

&ldquo We view Sheng Siong as a defensive play amid rising inflation and slower economic growth. We believe demand for groceries will continue to normalise in 2024, but could be potentially supported by a shift in consumption patterns towards a focus on &ldquo value for money&rdquo due to inflationary pressures and a higher cost of living,&rdquo say the research team.

 

Moreover, grocery sales could be supported by Singapore Budget 2024&rsquo s announcement on inflation offset measures such as the CDC vouchers.

 

However, January 2024 saw supermarket and hypermarket sales decline by 6.5% y-o-y, according to the Singapore Department of Statistic. Overall, sales of supermarkets & hypermarkets have seen a declining y-o-y trend since May 2022, normalising from its elevated sales during the Covid-19 period.

 

Meanwhile, shares in Sheng Siong have declined by about 4% ytd, likely due to concerns over its slower revenue growth and margin expansion in 4QFY2023 ended December 2023. The group has also renewed electricity contract for FY2024 at lower tariffs and continues to roll-out more self-checkout machines at its stores to improve labour productivity.

 

In FY2023, only two new stores were open, due to slower pace of tendering exercise for commercial units by the Housing Development Board (HDB). In early 2024, the group had already won two tenders. Coupled with a robust pipeline of 10 units up for tendering, the research team believes that Sheng Siong&rsquo s store opening will reaccelerate this year, reaching its target of opening at least three new stores in 2024.

Analysts have missed sentiments on supermarket operator Sheng Siong following its latest FY2023 ended Dec 31, 2023 results.

 

To recap, the group&rsquo s earnings for the full-year period came in at $133.7 million, a slight 0.3% higher than $133.3 million last year. Revenue also saw a marginal increase of 2.1% y-o-y to $1.37 billion. The increase was primarily driven by the six new stores, which contributed a 2.5% y-o-y increase to total sales. This was partially offset by a lower revenue contribution from the Yishun store that was closed in FY2022 due to lease expiration.

 

For the 2HFY2023 period, revenue was 2.2% higher y-o-y at $677.2 million, while earnings gained 3.6% y-o-y to $68.3 million.

 

The results, however, did not meet the expectations of Citi Research analyst Luis Hilado. Hence, he has reaffirmed his &ldquo sell&rdquo call on the stock with a target price of $1.43.

Positive sentiments

 

Meanwhile, RHB Bank Singapore is much more bullish as it has kept its &ldquo buy&rdquo recommendation, but with a lower target price of $1.96 from $1.99 previously.

 

Analyst Alfie Yeo says: &ldquo We remain upbeat on Sheng Siong with growth fuelled by new outlet wins and better consumption on higher purchasing power from the Budget 2024 announcement.&rdquo

 

See also: Analysts lower TP for First Resources, Maybank downgrades call to ' hold'

 

He expects the group to be a beneficiary of the latest budget announcement, which will help boost consumer purchasing power and consumption, especially from the CDC vouchers.

 

Yeo also expects new store openings to be robust on the Housing & Development Board&rsquo s (HDB) healthy pipeline of new outlets. He elaborates that HDB has a pipeline of five new supermarkets outlets up for tender over the next six months, with eight more lined up beyond the six months till end 2024. Sheng Siong is expected to secure some of these outlets and Yeo assumes three outlets per annum in his forecast assumptions, adding to the 69 stores its currently has.

 

While risks include slower-than-expected store openings, lower sales demand and per sq ft traction and the inability to maintain gross profit margins at current levels, Yeo expects the group&rsquo s performance to remain resilient as it targets the mass market value segment, which will enjoy effects of downtrading in a soft consumption environment.

 

&ldquo Valuation at -1 standard deviation (s.d.) from its historical mean forward P/E (about 19x) is attractive. The stock is also supported by approximately 4% FY2024 yield,&rdquo says Yeo.

 

Neutral view

 

On the other hand, DBS Group Research has reiterated its &ldquo hold&rdquo call and $1.62 target price on Sheng Siong.

 

&ldquo We have adjusted our earnings forecast on the back of higher store count growth and faster gross margin expansion. While we continue to like the company&rsquo s pace of execution, we do not see any material near-term re-rating catalyst,&rdquo say analysts Chee Zheng Feng and Andy Sim.

 

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While they continue to like the company&rsquo s strong pace of execution, in the short term, they believe the higher-for-longer interest rates will continue to put a cap on share price.

 

Chee and Sim also like the stock for its track record of securing products at competitive prices. It has been able to deliver consistent gross margin expansion due to its ability to procure products at competitive prices. &ldquo With its strength in competitive sourcing, Sheng Siong is well-positioned to supply price-competitive offerings while being able to grow its margins consistently over time,&rdquo say the analysts.

 

Moving forward, growth in FY2024 and FY2025 is expected to come from new stores and continued margin expansion.

 

&ldquo With one tender secured and 10 upcoming for the year, we believe the company has more than an even chance of securing at least four stores this year (versus the previous expectation of three). In addition, given the strong gross margin showing in FY2023, we also made an upward revision to our gross margin assumptions for FY2024F/FY2025, from 29.9%/30.0% to 30.2%/30.4%,&rdquo they say.

 

The analysts are also looking out for upcoming HDB tender results. &ldquo Apart from the winning bid, we are also watching the timeline of the tender process. We are seeing early signs pointing at the normalisation of the tender approval process, with the October 2022 tender results announced in January 2024, within the typical three-month timeframe,&rdquo say Chee and Sim, adding that this solidifies their optimism for the tender results that are to be announced this year for the 10 pending stores and thus the growth of Sheng Siong&rsquo s overall store count.

 

SINGAPORE - Supermarket chain Sheng Siong on Feb 27 reported a 3.6 per cent increase in net profit to $68.3 million for the second half of 2023, from $65.9 million in the year-ago period.

 

This comes as the group doubled its finance income in the half year to $5.8 million, from $2.9 million in the corresponding period a year ago.

 

Sheng Siong said it generated higher interest income from placing more cash in fixed deposits at higher interest rates.

 

Staff costs, utilities and other expenses rose $9.1 million on the half year, however.

 

H2 revenue, meanwhile, rose 2.2 per cent to $677.2 million, from $662.7 million in the year before, on the opening of six new stores in FY22 and FY23 in Singapore. The stores&rsquo opening contributed 1.9 per cent to the growth, the company noted.

 

Earnings per share for the half was 4.54 Singapore cents, increasing from 4.38 cents.

 

The board thus proposed a final one-tier cash dividend of 3.2 Singapore cents per share, higher than the 3.07-cent-per-share dividend announced in the previous year.

 

The dividend will be paid on May 17, if approved by shareholders at an annual general meeting to be held on Apr 25, the group declared.

 

With the final dividend, the group&rsquo s total dividend for the year would come up to 6.25 Singapore cents per share, higher than FY22&rsquo s 6.22 Singapore cents, it noted. This takes into account the interim dividend of 3.05 Singapore cents per share, which the company has already paid out.

 

For the full year ended Dec 31, 2023, Sheng Siong&rsquo s net profit was up 0.3 per cent on the year to $133.7 million, while its revenue climbed 2.1 per cent to S$1.4 billion.

 

These were as operating profit after tax came in at $134 million, higher than the previous year&rsquo s operating profit of $133.6 million.

 

Staff costs in FY23, in particular, rose $6.6 million as the company raised salaries in FY22 in response to the tight labour market. Utility expenses for the year grew $13.8 million as the group had to renew its electricity supply agreement at the prevailing market rate at the end of FY22, the group added.

 

Meanwhile, new stores bumped up total sales slightly, by 2.5 per cent, while the closure of the Yishun Central store in July 2022 due to lease expiry caused sales to fall 0.3 per cent.

 

As at Dec 31, 2023, Sheng Siong runs 69 stores in Singapore, and five stores in China, up a total of three stores from a year ago.

 

RHB Bank Singapore analyst Alfie Yeo is keeping his &ldquo overweight&rdquo call on the retail-staples sector as he sees stronger consumption on the cards.

 

&ldquo Our economics desk estimates Singapore&rsquo s 2023 GDP growth forecast at 1.5% before accelerating to 3% in 2024 &ndash driven by with an improving external environment,&rdquo says Yeo in his Jan 3 report.

 

&ldquo This should translate into more positive consumption and income from the workforce eventually, as domestic industries recover and benefit from a more robust global demand,&rdquo he adds.

 

Within the sector, Yeo has named Sheng Siong Group OV8 -0.64% and DFI Retail Group D01 0.00% (formerly Dairy Farm) as his top picks. The analyst likes Sheng Siong for its stable earnings and dividends and DFI for its earnings turnaround and strong dividend yield.

 

The analyst, who has &ldquo buy&rdquo calls for both counters, sees valuations at 13 to 17 times FY2024 P/Es as &ldquo currently compelling&rdquo . Both Sheng Siong and DFI have dividend yields of 4% to 6%. Sheng Siong has an earnings growth outlook of 7% while DFI&rsquo s is 17%.

 

Furthermore, the latest reported earnings for both counters during the 3QFY2023 were largely in line with Yeo&rsquo s expectations. Both counters&rsquo year-ends are in Dec 31.

 

&ldquo Revenue growth was driven by new outlets for Sheng Siong, while for DFI, tourist recovery to Hong Kong and demand recovery drove strong same-store sales growth at Mannings and its convenience division,&rdquo says Yeo. &ldquo There were minimal changes to our earnings forecasts post 3QFY2023 earnings as results were within expectations.&rdquo

 

Following the Covid-19 pandemic, the analyst sees supermarket sales to be normalised going forward.

 

&ldquo Revenue growth for the sector is now largely at a more normalised and moderated pace from abnormal levels seen during Covid-19 restrictions. We hence expect low to mid-single digit revenue growth for Singapore grocery retail sales for 2024, with the index at around 120-point levels,&rdquo he writes.

 

In the next six months, there will be eight new Housing & Development Board (HDB) supermarkets up for bidding albeit reducing the pipeline of planned new HDB supermarkets to two in the 2H2024.

 

&ldquo Nonetheless, the robust supply that is expected to come on stream in the shorter term will benefit supermarket players a whole, offering more opportunities for grocery retail players overall to win more new outlets,&rdquo says Yeo.

 

&ldquo Our investment thesis on DFI is based on earnings recovery (18% earnings compound annual growth rate or CAGR growth from FY2023 to FY2025) at a compelling valuation. We anticipate a recovery in FY2024 &ndash driven by an expected pickup in demand in the various markets, and improving domestic consumption,&rdquo he adds. &ldquo Dividend yield is attractive due to parent company Jardine Matheson Holdings J36 0.17% &rsquo practice of uplifting dividends back to the group level. We see earnings driven by sturdy domestic consumption and a pick-up in tourism in Hong Kong, on top of the continued economic recovery in Asean and China.&rdquo

 

Based on Yeo&rsquo s estimates, DFI is currently trading at an attractive 14 times FY2024 P/E versus his implied target P/E of 17 times.

 

On Sheng Siong, the analyst sees the group growing via its new outlets, the performance of its new stores and better operating efficiency with plans for a new distribution centre.

 

&ldquo Outlook is positive, based on domestic supermarket consumption, new store outlook, and its China operations. Sector risks include margins pressure from higher-than-expected operating costs and/or consumer demand,&rdquo he says.

 

Yeo has a target price of $1.99 for Sheng Siong and US$2.92 ($3.88) for DFI.

 

WHEN residents first started moving into their built-to-order (BTO) flats in Tengah, a new town in Singapore&rsquo s west, they were surprised by the lack of key amenities such as supermarkets.

 

The way analysts see it, the increasing supply of BTO flats could be a catalyst for supermarket operators such as Sheng Siong Group : OV8 -1.89%.

 

Analysts said that new spaces put up for tender by the Housing and Development Board (HDB) will enable the supermarket chain to expand its network of stores across the island. A recent UOB Kay Hian report noted that the statutory board has put out 23,000 BTO flats this year, up 34.5 per cent from 17,100 in 2021.

 

With more townships being created, there is no lack of tenders for the Catalist-listed Sheng Siong to bid for.

 

Sheng Siong, which now runs 69 stores in Singapore, said in its latest business update that it is eyeing outlets in areas where it does not have a presence.

 

This is likely to bring in new customers immediately, the group said, bringing bumps to its top and bottom lines.

 

The strategy appears to have worked well for Sheng Siong so far. Its revenue for the third quarter ended Sep 30 ticked up 3.7 per cent to S$345.8 million from S$333.5 million in the corresponding year-ago period, largely driven by new-store sales.

 

In the first nine months of FY2023, the group&rsquo s revenue grew 2.6 per cent to S$1 billion from the corresponding year-ago period.

 

Sheng Siong won one of the last two tenders put up by HDB, going by results announced on Oct 11. As at Nov 22, the results of three more tenders are pending.

 

The group is also likely to bid for the five tenders that HDB will put up in the next six months, analysts said.

 

DBS analysts Chee Zheng Feng and Andy Sim explained: &ldquo With a large pool of HDB leases up for bidding and an arbitrary one-third chance of winning &ndash considering two other major competitors, NTUC FairPrice and DFI Retail Group : D01 +0.91% &ndash we believe the company should be able to open three new stores next year.&rdquo

 

As new stores will directly drive top line growth, new openings could bode well for the company&rsquo s stock, which has fallen from pandemic highs with the normalisation of earnings post-Covid.

 

A pandemic-led rush pushed the stock to an all-time high of S$1.85 in August 2020.

 

On Thursday (Nov 30), it stood at S$1.56, down 5.5 per cent this year.

 

This gives the stock a market value of S$2.3 billion, and a forward price-to-earnings ratio of 17.3 times.

 

In comparison, Singapore-listed peer DFI Retail Group, whose businesses include Cold Storage and Giant supermarkets, has seen its value fall 24.2 per cent this year and has a forward price-to-earnings ratio of 19.5 times.

 

One of the reasons for Sheng Siong&rsquo s slower-than-expected growth has been a longer timeline for the tender process for new stores in Singapore.

 

OCBC Investment Research analysts in October revised its forecasted number of new store openings for 2023 to two, down from three previously.

 

The research house expects another three new stores in 2024.

 

However, DBS&rsquo Chee and Sim are optimistic that this longer timeline would normalise to an average of two to three months for the upcoming tenders.

 

&ldquo A short tender timeline would accelerate new store openings and provide an uplift to the company&rsquo s top and bottom lines,&rdquo they pointed out.

 

Analysts noted that the company could also enjoy greater demand from high inflation and the looming Goods and Services Tax hike in 2024.

 

UOB Kay Hian said that the supermarket chain should continue to &ldquo enjoy healthy demand&rdquo because of its competitive pricing.

 

RHB Singapore senior research analyst Alfie Yeo said: &ldquo We expect Sheng Siong Group&rsquo s performance to remain resilient, as it targets the mass-market value segment, which will enjoy effects of downtrading in a soft consumption environment.&rdquo

 

DBS Group Research and Phillip Securities have lowered their target prices on Sheng Siong : OV8 +3.4%, while RHB has raised its target price. They remain mixed on the grocer group&rsquo s valuations, but optimistic on its FY2024 growth prospects amid potential for new store openings.

 

On Monday (Oct 30), DBS Group Research lowered its target price to S$1.62 from S$1.76, and maintained its &ldquo hold&rdquo recommendation on the stock. The drop in target came after the research team applied a lower valuation peg on the counter.

 

Although DBS continues to like Sheng Siong for its operational excellence and potential tailwinds from cost improvement, it does not foresee any material near-term rerating catalysts.

 

Meanwhile, Phillip Securities cut its target price to S$1.80 from S$1.98, implying a potential upside of 19.2 per cent from the counter&rsquo s trading price of S$1.51 as at the midday trading break on Monday. Sheng Siong&rsquo s shares were up 2.7 per cent or S$0.04 at the time.

 

It maintained its &ldquo buy&rdquo call on the counter and left its estimations for FY2023 unchanged, it said in a separate report on Monday.

 

The research team noted that historical valuations had been &ldquo creeping downwards&rdquo due to a derating of growth expectations post pandemic. Sheng Siong is now trading at 20 times earnings, versus 22 times previously.

 

In contrast, RHB raised its target on the counter to S$1.99 from S$1.95, implying a potential upside of 31.8 per cent. It maintained &ldquo buy&rdquo on the stock.

 

The higher target came after the research team rolled over its valuation methodology from a blended price-to-earnings (PE) ratio of 21 times for FY2023-24, to a PE ratio of 21 times for FY2024. It left its earnings forecasts for FY2024-25 unchanged, as its outlook on Sheng Siong remains positive.

 

For RHB, Sheng Siong&rsquo s valuation remains attractive at one standard deviation below its historical mean PE ratio. The stock is also supported by a FY2024 yield of 5 per cent.

 

It noted that Sheng Siong continued to show resilience during the latest quarter, with decent revenue and earnings growth despite a high base from last year&rsquo s earnings due to Covid-19 restrictions. The group also saw strong contributions from new stores amid a &ldquo firm consumption environment&rdquo .

 

On Oct 26, Sheng Siong posted a Q3 net profit of S$34.8 million, up 5.7 per cent from S$32.9 million for the year-ago period. Revenue rose 3.7 per cent on the year to S$345.8 million, from S$333.5 million.

 

The results were in line with the expectations of RHB and Phillip Securities. The latter noted the growth in Sheng Siong&rsquo s earnings despite spikes in salaries and an increase in electricity costs.

 

Analysts anticipate new store openings to drive growth for Sheng Siong.

 

Due to the large pool of Housing and Development Board leases up for bidding, DBS now believes the group will be able to open three new stores in 2024, versus its initial two-store prediction.

 

Phillip Securites, meanwhile, is expecting a larger roll-out of new stores, lower utility costs, a rise in interest income and stable gross margins.

 

&ldquo The inflationary environment has caused households to be more price-conscious. Sheng Siong benefits from its reputation as a value grocer. Maintaining market share is more critical than lower margins,&rdquo said Phillip Securities head of research Paul Chew.

 

Sheng Siong said that sales contribution from its six new stores rose by 2.2 per cent. 

SINGAPORE &ndash Grocer group Sheng Siong on Thursday posted a third-quarter net profit of $34.8 million, up 5.7 per cent from the $32.9 million posted the year before.

 

Revenue in Q3 rose 3.7 per cent to $345.8 million, from $333.5 million last year.

 

Sheng Siong said that sales contribution from its six new stores rose by 2.2 per cent, which is more than the 1.8 per cent growth logged in its other comparable stores.

 

Earnings per share rose 5.9 per cent to 2.31 Singapore cents, up from 2.18 cents last year.

 

The group expects challenging economic and geopolitical conditions to linger. It also flagged climate risks from the onset of the El Nino weather pattern, which may threaten agriculture yields and drive up food prices amid smaller harvests and pricier animal feed.

 

Margins may also suffer as a result of fierce pricing action among major grocers, and higher energy and staff costs, Sheng Siong added.

 

However, the group expects a boost in sales from the support packages distributed by the Government. It also notes that the higher GST rate and carbon taxes have created a growing preference for home-cooked meals.

&ldquo The group will explore potential technological improvements and focus on strengthening its core competencies to improve overall operational efficiency and productivity,&rdquo it said.

 

Supermarket operator Sheng Siong OV8 0.00% announced that its subsidiary Sheng Siong (China) Supermarket had on Sept 11 entered into a lease agreement with Kunming Aegean Shopping Center for a retail space of approximately 83,624 sq ft at Yunnan Aegean Shopping Park.

 

The new store is expected to be operational before the end of 2Q2024.

 

This will bring the group&rsquo s store count to 69 in Singapore and six in China. This new store is not expected to have a significant impact on the group&rsquo s financial performance for FY2023 ended Dec 31.