Broker's take: DBS maintains 'buy' on supermarket plays Sheng Siong, Dairy Farm

DBS Group Research is maintaining its "buy" call on supermarket chain operators Sheng Siong Group and Dairy Farm International.

The research team lifted its target price for Sheng Siong to S$1.91, pegged to regional peers. It maintained its "buy" call on Sheng Siong for a potential upside of 11 per cent.

Shares of Sheng Siong were trading down S$0.03 or 1.7 per cent to S$1.70 on a cum-dividend basis on Thursday.

On potential catalysts, DBS analysts Alfie Yeo and Andy Sim said the supermarket chain could eventually be a takeover target for online players such as Alibaba's Hema and Amazon (Wholefoods) - which are taking the online-to-offline route and operating physical stores.

The lift in target price followed a rise in DBS's forecast for the supermarket chain's FY2020-21 earnings by 15 per cent to 35 per cent due to stronger than expected second-quarter earnings led by the Singapore "circuit breaker" period.

"Sheng Siong is a direct beneficiary of Singapore supermarket sales in addition to its defensive qualities of strong balance sheet and cash flow generation capabilities," Mr Yeo and Mr Sim said in a research note on Thursday.

DBS on Thursday separately lowered its target price to US$4.86 for Dairy Farm International - which is also in the grocery retail business. Dairy Farm operates a number of brands across its food, health and beauty, home furnishings, restaurants and other retailing divisions. In Singapore, the company's grocery retail arm runs the Cold Storage and Giant supermarkets.

Shares of Dairy Farm were trading up S$0.11 or 2.7 per cent to US$4.26 as at 12.35pm on Thursday.

The cut in target price was in line with the research team's 16 per cent earnings cut for Dairy Farm's FY2020 forecast. This came after Dairy Farm reported weaker than expected earnings for the first half of 2020, dragged by lower contributions from its restaurants associate Maxim.

However, Dairy Farm's grocery retail segment saw strong sales traction in H1 2020 as consumers stayed home, with sales growing 5 per cent year on year to US$2.8 billion.

Giant store remodelling, group procurement, new upscale formats helped to drive efficiency and strong turnaround momentum, especially in Singapore and Malaysia, Mr Yeo and Mr Sim said in another research note on Thursday.

Dairy Farm is also on course for a turnaround, with store-level initiatives showing improvement in H1 2020.

"We expect more efficiency benefits to come from ongoing management initiatives that will put DFI (Dairy Farm) on track for earnings improvement and re-rating over the long term," Mr Yeo and Mr Sim said.