Analysts note that the supermarket operator has managed to achieve industry-leading margins through a no-frills, disciplined investment approach

[SINGAPORE] DBS Research Equity on Tuesday (Jun 10) raised its target price for Sheng Siong : OV8 0% to S$2.30 from S$2 on the back of strong earnings growth and resilient margins, despite a volatile macroeconomic environment.

 

The brokerage also maintained a &ldquo buy&rdquo rating, with the revised target implying a 25 per cent upside from its last traded price of S$1.84 on Thursday.

 

Bank analysts Chee Zheng Feng and Andy Sim noted that the supermarket operator had managed to achieve &ldquo industry-leading margins through a no-frills, disciplined investment approach&rdquo .

 

Sheng Siong had one of the leanest cost structures among grocery retailers globally, they added. It still remained relevant to domestic consumers despite minimal investments made in marketing, e-commerce platforms and membership programmes &ndash in contrast to its peers. For instance, DBS noted, it held a margin superiority over NTUC FairPrice with supply chain efficiency and sharper pricing. Sheng Siong also benefits from having a single centralised distribution centre, as compared to NTUC&rsquo s diversified sourcing.

 

Furthermore, in light of the supermarket operator&rsquo s projected store network expansion, DBS also expects to see earnings growth.

 

Already, in its first quarter ended Mar 31, Sheng Siong recorded a 6.1 per cent increase in net profit to S$38.5 million. Its revenue grew 7.1 per cent to S$403 million, from S$376.2 million in the corresponding period the previous year.

 

These gains were contributed by the eight stores which opened in the quarter and in FY2024. There are six additional locations secured and scheduled to open in its third quarter, and the group is awaiting the results of another four tenders.

 

&ldquo Sheng Siong has maintained stable margins in Q1 2025, reflecting good cost control and gross margin improvement through better economies of scale and procurement efficiencies,&rdquo noted Chee and Sim, amid investor concerns about the sustainability of operating margins with rapid expansion.

 

The analysts added that network expansion will drive both revenue and margins over the next two to three years.

 

The company is exploring private site opportunities and asset acquisitions outside its usual approach of setting up shop within the heartlands.

 

While only one supermarket is expected to open in a new Build-To-Order estate in 2026, the DBS analysts still expect the influx of new households into these new estates to contribute S$69.3 million in incremental revenue.

 

DBS also foresees the S$1.1 billion in SG60 supermarket vouchers to lift industry-wide demand.

 

The bank raised its target price-to-earnings ratio to 20.9 times, from 19 times, for FY2026 on Sheng Siong&rsquo s stable growth prospects.

 

Added the analysts: &ldquo In today&rsquo s volatile macroeconomic environment, we believe investors will continue to assign a higher valuation to well-managed, stable companies like Sheng Siong.&rdquo

Sheng Siong group' s planned store openings for FY2025 have led to a positive sentiment among analysts.

 

Citi Research analyst Gan Huan Wen has a " buy" call on the stock, with a raised target price (TP) $2.05 from $1.90 previously.

 

He writes in his April 30 report: " Sheng Siong' s six new stores in the pipeline will take full year store additions to eight, much higher than previously guided minimum of three.

 

Sheng Siong has won four out of the six recent HDB tenders, with another two stores planned to open in retail malls Kinex and The Cathay.

 

On this, Gan notes: " We understand all but one of these stores were previously operated by a competitor. We are positive on this, given locations with former supermarket tenants generally have a quicker payback period."

 

He also expects Macrovalue, the recent acquirer of Cold Storage and Giant, to give up unprofitable store locations, paving the way for Sheng Siong to open even more stores.

 

On the Sheng Siong' s results, Gan expects staff costs to drag the group' s 2QFY2025 gross profit margins, which should continue to edge up as they continue to grow sales mix of perishables and optimize procurement.

 

However, the analyst anticipates Sheng Siong' s 2QFY2025 earnings to be softer q-o-q from the absence of Chinese New Year and Hari Raya festive earnings in addition to increased staff cost in preparation for newer stores.

 

Meanwhile, CGS International' s (CGSI) Meghana Kande and Lim Siew Khee are keeping " add" at an unchanged TP of $1.90, as are DBS Group Research' s Chee Zheng Feng and Andy Sim with their " buy" call, albeit at a raised TP of $2.00 from $1.90 previously.

 

CGSI' s Kande and Lim note that Sheng Sion' s 1QFY2025 profit after tax and minority interests (patmi) of $38.6 million was a slight beat at 27% of both their and Bloomberg consensus' FY2025 estimates.

 

Revenue in the period grew 7% y-o-y to $403 million, outperforming the national supermarket industry' s 0.4% y-o-y decline in the 2MFY2025.

 

They write: " This was driven by solid contribution from eight new stores opened since January. Same store sales were broadly flat yoy, which management attributed to some normalisation in mature outlets and lower average selling prices (ASP) for fresh products."

 

On the group' s store openings, Kande and Lim expect Sheng Siong to target the mass market with slight changes to sales mix based on local demographics.

 

They write: " Given four more tenders pending, we now expect Sheng Siong to open 10 new stores in FY2025- its highest since 2018."

 

" While we think upfront staffing and rental expenses for new stores could weigh on FY2025 earnings growth, we expect operating leverage to kick in from FY2026," add the analysts.

 

With this, the DBS analysts trim their earnings per share (EPS) estimate for FY2025 by 1% ahead of store openings but raise their FY2026 and FY2027 EPS by 2% and 5% respectively as they expect contribution from new stores to pick up.

 

Kande and Lim write: " We reiterate our ' add' call as we continue to like Sheng Siong for its 4% to 6% earnings growth over FY2025 to FY2027 from an expanded store base."

 

Re-rating catalysts noted by them include an increase in HDB new store tenders and potential wage support by the government to alleviate escalating staff costs.

 

Conversely, downside risks include a tight supply of front-line service personnel increasing its staff costs and stiffer price competition.

 

Lastly, DBS' s Chee and Sim have revised their 1QFY2025 gross margin assumption upwards from 30.7% to 31.2%, supported by stronger economies of scale.

 

They add: " However, higher staffing and operating costs from store expansion led to us raising our operating expense ratio from 20.6% to 21.0%, effectively offsetting gross profit gains. We therefore maintain our FY2025 earnings forecast."

 

On Sheng Siong' s store openings, Chee and Sim have revised their gross margin estimate from 30.9% to 31.7%, reflecting continued scale efficiencies.

 

In addition, they have also adjusted the group' s operating expenses slightly from 21.0% to 21.1%.

 

" Net-net, we expect FY2026 earnings to come in 2.5% higher than our previous forecast," write the analysts.

 

Overall, Chee and Sim' s higher TP stems from Sheng Siong' s strong growth outlook, underpinned by a record 16 store openings across 2024-25 and an anticipated industry uplift from SG60 voucher disbursements in the 2HFY2025 and 1HFY2026.

 

One key risk noted by the pair is operational costs continuing to outpace gross profit growth.

 

Finally, PhillipCapital analyst Paul Chew, like his fellow analysts, has maintained his " accumulate" call at a raised TP of $1.89 from $1.76 previously.

 

He writes: " We believe Sheng Siong is gaining share and scale as competitors turn more subscale. The capture of market share and new stores will offset the soft same-store sales by around 1%. Wage inflation remains the most significant cost challenge due to the tight labour market, especially for locals."

 

He adds that the impact of the global trade war on the group is minimal, apart from changes in trade routes impacting the availability of containers.

Revenue is up 7.1%, driven by the opening of eight new stores

 

[SINGAPORE] Supermarket operator Sheng Siong : OV8 -0.57% recorded a 6.1 per cent increase in net profit to S$38.5 million for the first quarter ended Mar 31, from S$36.3 million the year before.

 

Revenue grew 7.1 per cent to S$403 million, from S$376.2 million in the corresponding period last year. This was thanks to contributions from eight new stores opening in the quarter and FY2024, as well as higher festive sales during Hari Raya in March, said the company in a business update on Tuesday (Apr 29). 

 

Gross profit consequently rose to S$122 million in Q1, a 10.2 per cent increase from the S$110.7 million posted the year prior. 

 

Earnings per share stood at S$0.0257, up 6.2 per cent from S$0.0242 in the year-ago period. 

 

The improved performance came despite operating costs rising 12.4 per cent to S$81.6 million. This was mainly due to an 8.8 per cent year-on-year increase in administrative expenses to S$15.8 million, and a 13.3 per cent rise in selling and distribution expenses to S$65.8 million.

 

Sheng Siong attributed these to higher staff costs from higher variable bonuses, which was in turn from a better financial performance, enhanced employment benefits and more employees hired for the new stores. 

 

Cash flow from operating activities fell by S$10.1 million, from more payments being made to banks and vendors during the quarter. Still, cash flow generated in the quarter rose by 3.8 per cent from the year before to S$366.9 million. 

 

Sheng Siong chief executive officer Lim Hock Chee predicts continued macroeconomic uncertainty amid geopolitical tensions. 

 

&ldquo Under this unpredictable environment, consumers will remain cautious and continue to prefer value-driven supermarkets and affordable house brand products,&rdquo he said. &ldquo Government support measures, including various vouchers and financial subsidies, will help to maintain consumer spending momentum and benefit supermarket sales.&rdquo  

 

Lim cited the attracting and retaining of qualified staff, increased investment costs and enhanced regulatory reporting as likely challenges that will strain the business margins of the retail industry.

 

&ldquo To navigate the complex environment, the group will continue to examine and expand its supply chain, refine the sales mix and focus on its core competence to optimise operational efficiency and productivity,&rdquo he said. 

 

&ldquo Despite the external challenges, we remain confident in our ability to grow and strengthen our presence in the years ahead.&rdquo For instance, six additional retail locations have been secured and are expected to open by the third quarter of this year. The group is awaiting the results of another four tenders.

 

&ldquo We continue to monitor suitable opportunities to expand our network and which align with our long-term strategy,&rdquo said Lim.

Sheng Siong Group has reported earnings of $137.5 million for FY2024 ended Dec 31, 2024, up 2.9% y-o-y. For the 2HFY2024, earnings decreased 1% y-o-y to $67.6 million.

 

Earnings per share for FY2024 came in at 9.15 cents per share.

 

For the reporting period FY2024, revenue for the group grew 4.5% y-o-y to US$1.43 billion, driven by the opening of six new stores in FY2024, and two comparable new stores opened in FY2023 in Singapore, and the improved performance of the existing stores. 

 

Revenue for 2HFY2024 came in 5.5% y-o-y higher at $714.5 million.

 

In line with revenue, gross profit grew by 6.1% in FY2024 to $435.5 million with a slight increase in the gross margin of 0.5 ppts to 30.5%. This was primarily attributed to the improvement in sales mix that helped offset elevated business costs.

 

Administrative expenses increased by 17.9% to $58.5 million in FY2024, while selling and distribution expenses increased by 6.8% to $236.5 million. They are primarily due to higher staff costs from increased variable bonuses, reflected by our stronger financial performance, enhanced employment benefits, and a larger workforce to support new store openings.

 

In FY2024, cash flow generated from operating activities increased by 23.7% y-o-y to $219.0 million, mainly due to higher vendor payments for working capital requirements in FY2023. 

 

The group ended the year with cash and cash equivalents balance of $353.4 million as at Dec 31, 2024, marking an 8.9% increase from $324.4 million at the end of FY2023.

 

The board of directors has proposed a final dividend of 3.20 cents per share, and combined with the interim dividend of 3.20 cents per share, the total dividend for FY2024 amounts to 6.40 cents per share. Payout ratio remains at 70%

 

Although Singapore&rsquo s overall retail sales index declined by 0.7% and 2.9% y-o-y in November and December 2024, the supermarket and hypermarket sector continued to grow, recording y-o-y increases of 2.0% and 0.8%, respectively. 

 

Looking ahead to 2025, the sector is expected to maintain its upward trajectory, driven by broader economic and consumer trends.

 

&ldquo Despite challenges in the macroeconomic and trade environment, our diversified supply chain allows us to manage costs effectively while maintaining a wide and reliable product selection for customers. We continue to focus on enhancing our margins by refining the sales mix, improving cost efficiencies, and strategically growing our store footprint to serve communities better and drive sustainable growth,&rdquo says Lim Hock Chee, Sheng Siong&rsquo s group CEO. 

 

&ldquo In line with our expansion strategy, we have opened 8 new stores in Singapore as of today since the beginning of FY2024, along with the launch of our 6th Store in Kunming, China. Additionally, we are awaiting the tender results for 8 stores by HDB. With a stable HDB housing supply pipeline, we remain confident in the future expansion opportunities to strengthen our presence across Singapore.&rdquo

 

Sheng Siong Group has reported earnings of $39.1 million for 3QFY2024 ended September, up 12.4% y-o-y from the same period last year. 

 

Earnings per share stood at 2.6 cents, up from 2.3 cents in 3QFY2023. 

 

For the same period, the group&rsquo s revenue saw a 5% y-o-y increase to $363.2 million. This came on the back of the net increase in total stores to 79, up from 74 in the same period last year. In addition, the group says comparable same store sales rose by 1.5% y-o-y. 

 

Accordingly, gross profit for 3QFY2024 stood at $113.8 million, up 8.4% y-o-y. The group&rsquo s gross profit margin saw a slight increase by 1.0 percentage points (ppt) to 31.3%, due to an improvement in sales mix, which offset elevated business costs.

 

Additionally, other income for the period increased by 96.5%, driven by the receipt of the progressive wage credit scheme grant in 3QFY2024.

 

Administrative expenses rose by 15.9% y-o-y to $15.3 million in 3QFY2024, while selling and distribution expenses increased by 6.4% y-o-y to $59.1 million. 

For 3QFY2024, the group&rsquo s generated cash flow from operating activities rose by 7.6% y-o-y to $59.1 million, due to higher profit reported in this period. As at Sept 30, the group ended the quarter with a cash and cash equivalents balance of $350.1 million. 

 

Moving forward, the group expects competition in Singapore' s supermarket industry to remain high. Additional uncertainties such as rising labour and energy costs and the increasing focus on sustainability, which could contribute to higher operational expenses, are also expected. 

 

In response, the group says it remains focused on &ldquo strengthening its core competencies and diversifying its supply chain to build a more resilient network capable of withstanding external disruptions&rsquo . 

 

Lim Hock Chee, CEO of Sheng Siong Group OV8 , says: &ldquo Looking ahead, we will continue to focus on driving sustainable growth by enhancing our operational efficiency, expanding our product offerings, and strengthening strategic partnerships.&rdquo  

 

He adds that the group has since opened five new stores, which include an addition at   Blk 512 Bishan Street 13, as part of its ongoing efforts to strengthen Sheng Siong&rsquo s presence.