Brokers’ take: Analysts mixed on Sheng Siong as Q1 sales normalise

ANALYSTS were mixed on Sheng Siong ’s growth prospects after the group posted on Apr 28 a 0.4 per cent fall in revenue to S$356.5 million for the first quarter of 2023 as sales normalised following the easing of pandemic restrictions.

DBS Group Research downgraded Sheng Siong to “hold” from “buy” and retained its target price of S$1.82. 

Meanwhile, RHB maintained its “buy” call for the counter and target price at S$2. OCBC Investment Research also kept its “hold” call but raised its fair value estimate to S$1.94 from S$1.89. 

Both DBS and RHB said that Sheng Siong’s revenue and earnings were within their expectations. The group recorded a 5.2 per cent fall in profit to S$33.2 million for Q1. 

DBS said that the retailer has been successful in establishing itself as the “go-to value grocery chain” due to its significant economies of scale in terms of procurement. 

With economic growth slowing, RHB analyst Alfie Yeo said Sheng Siong would benefit from more down-trading as shoppers switch from higher-end supermarkets to mid-income segment supermarkets. 

OCBC said the counter was a “defensive play” amid inflationary pressures. The brokerage added that measures, for example the GST Voucher scheme – announced in Budget 2023 – could further support grocery sales.

Sheng Siong is also set to benefit from new store openings. 

As at Mar 31, the group has 68 outlets in Singapore and recently opened its fifth store in China. RHB expects to see more outlets coming on-stream as Sheng Siong bids for new outlets stemming from the acceleration of Housing and Development Board projects. 

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DBS projects the group’s overall revenue to grow by 5 per cent in its FY23 forecasts on the expectation of three new store openings this year, along with higher contributions from four stores that opened last year. 

Beyond store openings, the retailer’s better product mix could support revenue and earnings growth. 

OCBC noted that Sheng Siong will continue to improve its sales mix towards products that carry higher margins, such as house brands and fresh produce. 

Gross margin expansion from an increase in the house brand sales mix is a key share price driver, added DBS.

Despite the group’s resilient earnings and gross margin expansion, DBS said that there is limited upside to the counter as these have been priced in at current share price levels. 

However, the brokerage acknowledged that Sheng Siong is a well-run business and said the counter could be accumulated at lower levels should its share price fall. 

Conversely, RHB maintained its estimates for Sheng Siong, noting that the stock is currently trading below its historical price-to-earnings ratio of 19 times. 

“We still like Sheng Siong for its growth potential, strong cash generation and defensive earnings,” it added.

Shares of Sheng Siong were trading S$0.01 or 0.6 per cent at S$1.80 as at 10.08 am on Thursday (May 4).