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.

 

SHENG Siong : OV8 +0.63%on Thursday (Jul 27) reported a 3 per cent decrease in net profit to S$65.4 million for the first half of 2023, from S$67.4 million in the year-ago period.

 

This comes as the group incurred higher operating expenses in the period, with staff costs increasing by S$6.1 million.

 

&ldquo Due to the competitive labour market and the requirements of the Progressive Wage Model, the group increased employees&rsquo salaries in FY2022,&rdquo it said.

 

Utility expenses also rose S$5.8 million after the group&rsquo s electricity supply agreement was renewed at a higher prevailing market rate last year. 

 

As a result, earnings per share fell to 4.35 Singapore cents, from 4.48 Singapore cents in the same period last year. 

 

However, the opening of five new stores in Singapore led to a 2 per cent increase in revenue to S$690.5 million, from S$676.8 million previously. 

 

Gross profit margin improved 0.3 percentage point to 29.7 per cent in H1 2023, from 29.4 per cent a year ago. This was driven by an improved sales mix of products with higher margins.

 

Sheng Siong&rsquo s cash flow position continues to remain strong, the group said. As at Jun 30, it had a cash equivalent balance of S$289 million. 

 

An interim dividend of 3.05 Singapore cents per share was proposed, representing a dividend payout ratio of 70 per cent. The dividend will be paid out on Aug 30. 

 

Group chief executive officer Lim Hock Chee said the group remains committed to bringing value-for-money offerings to its consumers. 

 

The group noted that reduced harvests induced by climate change and the onset of El Nino weather have put upward pressure on food prices. 

 

Lim said: &ldquo The group is managing risks by diversifying its sources of supply and strengthening business ties with existing suppliers. Additionally, our expansion strategy remains intact as we seek to open stores in new and existing housing estates, capitalising on the rising number of Housing Board projects in the near future.&rdquo

 

DBS Group Research upgraded its call on Sheng Siong : OV8 +1.2% to &ldquo buy&rdquo from &ldquo hold&rdquo in view of the supermarket operator&rsquo s recent share price weakness, its expansion prospects and potential savings from lower electricity costs.

 

Its target price remained unchanged at S$1.89, reflecting a 21 times price-to-earnings (PE) multiple based on FY2023 earnings estimates, and is one standard deviation below its mean pre-Covid PE multiple.

 

In a report on Monday (Jun 19), the research house said Sheng Siong&rsquo s current share price presents an &ldquo attractive re-entry level on the back of positive industry dynamics and an attractive valuation&rdquo .

 

As at the midday break on Tuesday, shares of the group were up S$0.02 or 1.2 per cent at S$1.68.

 

DBS is optimistic that the group&rsquo s net profit will increase on the back of steady revenue growth and easing utility cost pressure.

 

Highlighting that six Housing and Development Board (HDB)-located stores with &ldquo low competition nearby&rdquo are up for tender by year-end, DBS believes that securing a spot at these locations will present growth opportunities for Sheng Siong to deliver revenue per square foot on par with its existing stores.

 

Sheng Siong expects to open at least two new stores by year-end and scale up its suburban HDB footprint, which enables it to enjoy low rental rates.

 

DBS estimates that each new store will be able to contribute S$14 million to the group&rsquo s top line and S$1.3 million to its bottom line upon full ramp up. This would translate to a mean incremental net profit per annum of S$3.8 million to S$6.4 million for Sheng Siong.

 

In addition, the research house anticipates electricity costs to normalise by end-2023 due to falling natural gas prices.

 

This will amount to an estimated S$8 million in cost savings for FY2024, provided that natural gas prices remain at current levels.

 

&ldquo Given the continued decline in natural gas prices, we believe Sheng Siong is well-positioned to recontract at much lower rates when its utility contract expires at end-2023,&rdquo the research house said.

 

DBS believes that its forecast for FY2024, which assumes a S$9 million bottom-line growth, is &ldquo achievable&rdquo .

RHB Research on Thursday (Jun 15) raised its target price on Sheng Siong : OV8 0% to S$2.04 from S$2. It also maintained its &ldquo buy&rdquo call on the supermarket chain operator, as it believes valuations at current levels are attractive.

 

The new target price implies a potential 25.2 per cent upside from the counter&rsquo s last trading price of S$1.63 as at 2.55 pm on Friday. Shares of Sheng Siong were flat at the time.

 

The research house noted in its report that the group&rsquo s share price has declined along with the wider market, including the Straits Times Index. It said that although the group&rsquo s fundamentals &ldquo remain intact&rdquo , valuations are now one standard deviation below the mean of its historical forward price-to-earnings ratio of 16.9 times.

 

RHB also noted that Sheng Siong&rsquo s revenue held steady in the first quarter of 2023, outperforming the sector amid a year-on-year decline in Singapore retail sales. The group is also set to receive a full 12-month contribution from four new outlets opened in 2022.

 

&ldquo We therefore do not expect significant downside to our revenue forecasts,&rdquo said RHB analyst Alfie Yeo.

 

Due to Sheng Siong&rsquo s more diversified sourcing and sales mix enhancements, he projects the group&rsquo s gross margins to remain at levels close to 30 per cent. He also expects operating profit margins to be stable, as staff costs are &ldquo highly tied&rdquo to revenue performance.

 

Yeo expects Singapore&rsquo s supermarket retail sales for the second half of 2023 to be more comparable to H2 2022, since they have normalised earlier than expected.

 

&ldquo We had expected supermarket retail sales to normalise around May, but they rose 0.6 per cent year on year and 0.1 per cent month on month in April,&rdquo he said. He does not expect any unanticipated demand shocks or abnormal year-on-year declines of more than 5 per cent for retail sales in the sector.

 

SUPERMARKET operator Sheng Siong Group on Monday (Jun 12) responded to questions over its non-compliance of a corporate governance code provision setting out that independent directors (IDs) will need to make up a majority of its board.

 

The Singapore Exchange Securities Trading on Jun 8 said Sheng Siong has not complied with the provision, which is relevant as its chairman is not independent, along with a provision stipulating that non-executive directors have to make up a majority of the board.

 

Sheng Siong&rsquo s board currently comprises 10 directors, five of whom are non-executive and independent. Chairman Lim Hock Eng is part of the management team, and is a brother of chief executive officer Lim Hock Chee.

 

On Monday, the company said its reason had already been disclosed in its annual report for the 2022 financial year ended Dec 31. It was stated there that the board is of the opinion that it is &ldquo not necessary&rdquo to add more IDs and non-executive directors due to the group&rsquo s current size and operations.

 

Noting that the IDs and non-executive directors already make up half the board, it added the board is able to &ldquo exercise objective judgement through constructive dialogue&rdquo and &ldquo no individual or group of individuals dominate its decision-making process&rdquo .

 

It also said lead ID Patrick Chee Teck Kwong does avail himself to shareholders when they have concerns, and leads regular meetings without the management&rsquo s presence to discuss affairs of the group.

Sheng Siong, meanwhile, has given assurance that its IDs and non-executive directors &ldquo participate actively in discussions, reviewing and assessing management&rsquo s performance&rdquo . 

 

The group then reiterated that the board is of the view it has an &ldquo appropriate level of independence&rdquo and that its size is &ldquo appropriate&rdquo . 

 

SHENG Siong on Friday (Apr 28) reported a 5.2 per cent fall in Q1 2023 profit to S$33.2 million from S$35.1 million in Q1 2022.

 

Revenue for the quarter fell 0.4 per cent to S$356.5 million from S$358 million a year prior. The slight decrease in revenue is driven by the normalisation after easing of pandemic restrictions.

 

Gross profit margin improved 0.1 point to 28.8 per cent in Q1 2023 from 28.7 per cent in Q1 2022. This was driven by an improved sales mix of products with higher margins.

 

Administration expenses increased 6.5 per cent to S$63.2 million in Q1 2023 from S$59.4 million in Q1 2022. This was mainly due to an increase in utility expenses as the supermarket company recently renewed its electricity supply agreement at a higher prevailing market rate at the end of 2022, and higher labour costs from a tight labour market.

 

Rising inflation and geopolitical tensions continue to dampen the economic outlook. Supply chain disruptions have eased but are expected to continue further in 2023, said Sheng Siong.

 

The high inflationary environment continues to impact consumers, who may choose cheaper alternatives such as buying groceries and dining at home. The company believes that this might drive sales of its house brand and improve margins as consumers lean towards cheaper products.

 

Sheng Siong expects continued keen competition in the supermarket industry.

 

&ldquo In the midst of such economic uncertainty, the group remains focused on building on its core competencies and value-for-money offerings,&rdquo said its chief executive officer, Lim Hock Chee.