Brokers' take: CGS-CIMB downgrades Sheng Siong to 'hold', sees few catalysts after Q1

CGS-CIMB has downgraded Sheng Siong Group to "hold" from "add" while lowering its target price to S$1.60 from S$1.88 previously, on the belief that limited earnings catalysts are in sight for the supermarket operator.

The move follows Sheng Siong's Monday announcement of its Q1 FY2021 results, which were in line with CGS-CIMB's expectations. The group had posted a quarterly net profit of S$30.9 million, up 6.5 per cent from S$29 million in the preceding year on higher revenue from new-store contributions.

In a Tuesday report, CGS-CIMB said that while it was "heartened" by Sheng Siong's gross profit margins for the quarter, it believes further store openings may only emerge in Q4 of FY2021 as HDB (Housing Development Board) construction projects continue to face delays.

As such, the brokerage has lowered its forecast for store acreage addition in FY2021 to 5,000 square feet (sq ft) from its former 250,000 sq ft estimate. Its FY2021 to FY2023 earnings per share (EPS) forecasts have been reduced by 3.2 to 4 per cent accordingly.

"We had earlier expected more store openings in FY2021, but in view of construction sector delays, we now expect a slowdown in store openings in FY2021. Assuming Sheng Siong wins the upcoming bid (for one HDB site which could be open for tender on May 21, 2021), we estimate the new store to only contribute from 4Q FY2021 onwards," CGS-CIMB said.

While Sheng Siong had previously benefited from elevated demand amid Covid-19, the brokerage thinks this trend could taper off with the ramp-up of vaccination rollouts and the further reopening of Singapore's economy.

"Up to 75 per cent (previously 50 per cent) of the employees can now be at work, potentially causing home grocery expenses to normalise. We forecast Sheng Siong to turn negative starting Q2 FY2021, and forecast revenue decline of 9.3 per cent to S$1.26 billion in FY2021," it added.

This sentiment was echoed by DBS Group Research in a separate report on Tuesday, as it sees Sheng Siong's revenue and earnings normalising in FY2021 in the absence of "elevated and panic demand seen during the Covid-19 circuit breaker".

The research house nonetheless is maintaining its "buy" recommendation on the stock with an unchanged target price of S$1.77.

"Outlook for new HDB shop supply is positive due to the delay in completion of apartments and commercial space because of Covid-19, with more new shops likely to be released for tender towards the end of 2021 and 2022," stated DBS in its report.

Shares of Sheng Siong closed S$0.01 or 0.7 per cent higher at S$1.55 on Wednesday.