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Is there still room for growth for Sheng Siong?

Samantha Chiew
·6-min read

Can Sheng Siong keep up the growth momentum?

Supermarket operator Sheng Siong recently posted a set of rather outstanding FY2020 results. Earnings for the final year ended December 2020 increased by 83.1% y-o-y to $138.7 million, with revenue coming in at $1.4 billion, 40.6% higher y-o-y.

Looking at the group’s 4QFY2020 results, results were still impressive as earnings surged 84.5% y-o-y to $32.1 million, while revenue was 28.8% higher y-o-y at $319.3 million.

The surge in revenue and earnings was mainly attributable to consumers panic buying groceries during the circuit breaker period in 2QFY2020, as well as increasing work-from-home measures.

Although Sheng Siong notes that the demand for groceries have tapered off in 2HFY2020 as social distancing measures relaxed, the demand was still much higher than pre-Covid-19 levels.

With its stellar results, Sheng Siong declared a final dividend of 3.0 cents per share in FY2020, 50% higher than 1.8 cents declared in FY2019. For the overall FY2020 period, Sheng Siong has paid out 6.5 cents per share in dividends, equivalent to about 70.5% payout of its net profit after tax.

See: Sheng Siong posts 83.1% increase in FY2020 earnings to $138.7 mil

Already, shares in Sheng Siong have increased by some 21.88% since Feb 26, 2020, exactly a year ago from today, to $1.57. This is a slight moderation from the stock’s all-time high of $1.83 on Aug 7, 2020.

Despite the stock still trading at a high, analysts believe that there is still more room for growth and are recommending investors to “buy” into Sheng Siong.

PhillipCapital has upgraded its recommendation on Sheng Siong to “accumulate” with an unchanged target price of $1.71.

In a Feb 26 report, head of research Paul Chew notes that the group recorded healthy revenue despite reopening and posted a record high cash flow along with a dividend hike.

However, Chew notes that Sheng Siong will see fewer store openings in 2021 as tendering of new stores by HDB has been temporarily suspended. There was only one tender for two HDB shops in 2020. There remains a pipeline of 20 stores to be awarded over the next 2-3 years but the timeline is unclear.

On the outlook, Chew says, “FY2020 revenue per sq ft was $2,423. We are estimating $2,100 for FY2021. This would still be 10% higher than pre-Covid-19’s $1,916 in 2019. The higher revenue reflects the current trend of consumption and cooking at home.”

Furthermore, with international borders largely closed, the number of households in Singapore should remain higher than prior years. But there is little clarity on whether home dining will sustain beyond FY2022, after Covid-19.

CGS-CIMB Research is keeping its “add” call on Sheng Siong with an unchanged target price of $1.88.

The target price represents 2.5 times standard deviation above Sheng Siong’s FY2012-2019 mean, as the research house believes that it deserves to trade at a premium over its historical average due to its strong balance sheet and strong market share in Singapore’s supermarket space.

Analyst Cezzane See notes that Sheng Siong ended FY2020 with 63 stores (571,200 sq ft) after opening three stores and closing one store in 2HFY2020.

Open bidding for supermarkets in Singapore has taken a breather since November 2020 (when two tenders were called, but no results so far) but according to Singapore’s Housing Development Board (HDB), there will be five open bids in 2021; five in 2022 and eight in 2023. “We forecast store acreage addition of 25,000 in FY2021 and 20,000 in FY2022 for Sheng Siong,” says See.

Looking forward, See expects Sheng Siong’s revenue-per-square-feet to gradually decline as the country recovers from the Covid-19 impact. She projects a 21.7% decline in FY2021 EPS and a 3.7% pick-up in FY2022.

Sharing similar sentiments, DBS Group Research continues to rate Sheng Siong a “buy” but with a lowered target price of $1.77 from $1.90 previously.

Analyst Alfie Yeo says, “Although normalising, we expect FY2021 earnings to remain elevated compared to pre-Covid years, driven by higher store count and strong sales psf. While Circuit Breaker measures may ease, restrictions on entertainment and work from home arrangements will help support demand for Singapore Supermarket sales.”

Yeo sees Sheng Siong, with its strong store network and logistics chain, as a perfect takeover target for online players eventually. He notes that online players such as Alibaba’s Hema and Amazon (Wholefoods) are taking the online-to-offline route and operating physical stores.

Overall, Yeo says, “We continue to like the stock for its stable earnings, cash generating abilities, and as a beneficiary of the Circuit Breaker Phase 3. As Singapore has yet to fully open up, we expect supermarket sales to remain robust, albeit lower than FY2020.”

OCBC Investment Research too has reiterated its "buy" call on Sheng Siong with a fair value estimate of $1.79.

Analyst Chu Peng likes the stock for its recent stellar FY2020 results, which beat expectations, as well as its five new stores that opened during the period.

Looking forward, the analyst expects about three to four new store openings in FY2021 due to the delay in bidding process and completion of projects.

"Looking ahead, we believe new stores growth will remain Sheng Siong’s key growth driver and strategy. We expect domestic market conditions to remain fairly muted in FY2021, despite the
rollout of vaccines in Singapore as the latter will take time to vaccinate the entire population in Singapore. This will mean that social distancing and the change to eat more frequently at home are
likely to remain in 2021 and should help to support supermarket sales growth in the first two to three quarters," says Chu, who also expects a gradual economic recovery in 2021-2022.

On the other hand, RHB Group Research is less bullish on Sheng Siong as it has downgraded its call on the stock to “neutral” from “buy” previously with a lower target price of $1.70 from $1.87.

“Sheng Siong reported record FY2020 results, with revenue and PATMI surging 40.6% and 83.1% y-o-y to $1.39 billion and $138.7 million. Although sales will likely remain elevated for 1HFY2021 as the WFH trend and travel restrictions stay in place, we think the current vaccination deployment could disrupt this trend for 2HFY2021 and result in a potential drop in sales and profit,” says analyst Jarick Seet.

Seet has noticed the number of patrons at malls and food & beverage outlets recovering significantly when compared to the start of Phase 2 of Singapore’s reopening of the economy. As such, he believe supermarkets’ sales dilution from the rise in on-premise dining has stabilised.

This, together with the steady supermarket sales from Oct-Dec 2020, indicates the current run rate (+20% from pre-Covid-19 levels) could be the new normal – as long as the WFH trend and travel restrictions remain.

“While we believe this trend will likely continue into 1HFY2021, the increase in public confidence on the vaccination programme’s efficiency will likely disrupt this trend and cause a potential drop for 2HFY2021,” adds Seet.

As at 1.20pm, shares in Sheng Siong are trading at $1.56 or 5.9 times FY2021 book with a dividend yield of 3.3%, according to RHB’s estimates.

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