RHB keeps 'overweight' on grocery retailers; picks Sheng Siong over DFI

RHB expects food spending to strengthen in the supermarket format next year, benefitting both DFI and Sheng Siong.

RHB Bank Singapore analyst Alfie Yeo has maintained “overweight” on Singapore grocery retailers, with Sheng Siong OV8 as his top pick.

In his Sept 14 report, Yeo notes that RHB has “buy” calls on both Sheng Siong and DFI Retail Group D01 as both have compelling valuations and earnings growth outlook.

Although RHB has trimmed its earnings expectations on both companies on the back of lower margins and performance, the pace of demand and revenue expectations are still intact, Yeo points out.

The 1H results for the sector saw earnings revision of -4% to -5% for Sheng Siong and -5% to -7% for DFI. Sheng Siong’s earnings trail RHB’s expectations slightly due to higher utilities and staff costs, while DFI’s overall earnings were affected by its Yonghui Superstores’ contribution after posting core operating profit that was in line.

“Despite the slight earnings disappointment, both companies’ revenue performed as anticipated, with little let-up in sector demand expectations. We therefore believe both companies are well placed to ride on the expected recovery in FY2024,” says Yeo.

Although Singapore’s supermarket retail sales have been normalising from last year when Covid-19 restrictions were still in place, recent months’ supermarket sales have remained firm at 121 index points, Yeo points out.

This suggests steady demand for supermarket spending and cautious spending on food consumption as the external environment weighs on GDP growth. “We see the current muted environment as positive for the sector, as food demand focuses on non-discretionary spending,” adds Yeo.

RHB’s economic desk estimates Singapore’s 2023 GDP growth at 2% before accelerating to 3% in 2024, with an improving consumption environment. Despite this, the projected growth is still below the 3.6% achieved in 2022.

With a continued cautious growth environment but slightly better appetite for consumption, RHB expects food spending to strengthen in the supermarket format next year, benefitting both DFI and Sheng Siong.

“We advocate DFI for an earnings turnaround and strong dividend yield, while we pick Sheng Siong for a more stable play with earnings and dividend yield stability,” says Yeo.

Sheng Siong’s growth will be largely driven by expansion, with new outlet wins and performance of its new stores as well as better operating efficiency with a new distribution centre planned.

Having secured its second new outlet at Yishun, the company is on track to reach RHB’s new store opening forecast of three stores for the current year. “A new distribution centre would support growth for a larger store network in the future as well,” says Yeo.

Meanwhile, DFI should see growth coming from a sturdy pick-up in domestic consumption and tourism in Hong Kong, as well as improved performance from its China business as economic growth accelerates.

Yeo’s target prices for Sheng Siong and DFI are $1.95 and US$2.92 respectively.

As at 9.05am, shares in Sheng Siong and DFI are trading at $1.53 and US$2.60 respectively.


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