Analysts less optimistic on Sheng Siong, Dairy Farm as supermarket craze eases
Singapore
ANALYSTS have cut their calls on Sheng Siong Group and Dairy Farm International, after the retailers posted a drop in net profits in the half-year ended June 30.
RHB downgraded supermarket operator Sheng Siong to "neutral" from "trading buy" and slashed its target price by S$0.34 to S$1.61. Phillip Securities trimmed its target price slightly to S$1.69 from S$1.71 previously, but maintained its "accumulate" call on the back of record-high gross profit margins in Q2.
Maybank Kim Eng, meanwhile, initiated coverage on Sheng Siong with a "sell" recommendation and a target price of S$1.33.
Shares of Sheng Siong closed at S$1.54 on Monday, down three Singapore cents or 1.91 per cent.
Sheng Siong last year saw a surge in its top line amid a supermarket dash for groceries and essentials at the start of Singapore's "circuit breaker" to curb Covid-19 infections.
But the group reported an 11.9 per cent drop in net profit to S$65.9 million, for H1 ended June 30, as revenue fell 8.8 per cent off the high base a year ago to S$681.7 million.
The way Maybank Kim Eng analyst Kareen Chan sees it, Sheng Siong's "best days are over".
"More people will dine out as the ban should be lifted in Q4 once vaccination rate passes 80 per cent in the city," Ms Chan said.
RHB analyst Jarick Seet is expecting sales and profitability to further normalise when borders reopen and more people resume their travel plans.
He also said Sheng Siong's pace of expansion could slow: "Sheng Siong typically opens three to five new outlets each year, but this pace should slow down this year due to the slower pace of construction, and previous delays in building activities causing job backlogs to pile up."
On the plus side, Sheng Siong has managed to improve its margins in spite of the revenue fall.
Phillip Securities analyst Paul Chew noted that gross margins of 28.9 per cent in Q2 surpassed their previous high of 28.1 per cent at the height of the pandemic in Q2 2020.
Sheng Siong's gross profit margin hit 28.2 per cent for H1, up 0.6 percentage point from the six-month period a year ago.
"Margin expansion was driven by a higher mix of fresh-food sales and house brands," Mr Chew said. "Gross margins at 28 per cent could be the new norm as fresh foods and house brands gain further traction."
Maybank KE's Ms Chan has forecasted a 7 per cent year-on-year decline in Sheng Siong's FY2022 earnings per share.
Over at Dairy Farm, DBS has downgraded its call to "hold" from "buy" and lowered its target price on the counter to US$3.96 from US$4.78. CGS-CIMB downgraded its call on the counter to "hold" from "add", and lowered its target price to US$4 from US$5.40.
Shares of Dairy Farm closed at US$3.69 on Monday, down US$0.07 or 1.86 per cent.
The group on Thursday posted a 69.5 per cent on-year decrease in net profit for the half-year period ended June 30
As with Sheng Siong, DBS analyst Yong Woon Bing expects Dairy Farm will face a normalisation of grocery retail demand in its key markets of Hong Kong and Singapore.
And although its convenience stores segment rebounded in H1 2021 amid a stable pandemic situation in China, a recent spike in Covid-19 cases in the country may create risks of another lockdown and dampen sales once again, Mr Yong said.
The group's online channel, Yonghui Superstores, also saw lower margins amid stronger online competition. And supermarket sales in Indonesia have been hit by consumers who switched to minimart chains amid a surge in Covid-19 cases, he added.
A continuing lack of Chinese tourist arrivals in Hong Kong is another challenge for Dairy Farm, said CGS-CIMB, analyst Ong Khang Chuen.
He has also lowered his expectations on the pace of Dairy Farm's margin recovery as the group undertakes more price investment campaigns.
