Brokers’ take: DBS upgrades Sheng Siong to ‘buy’ on attractive valuation, industry dynamics 

DBS Group Research upgraded its call on Sheng Siong to “buy” from “hold” in view of the supermarket operator’s recent share price weakness, its expansion prospects and potential savings from lower electricity costs.

Its target price remained unchanged at S$1.89, reflecting a 21 times price-to-earnings (PE) multiple based on FY2023 earnings estimates, and is one standard deviation below its mean pre-Covid PE multiple.

In a report on Monday (Jun 19), the research house said Sheng Siong’s current share price presents an “attractive re-entry level on the back of positive industry dynamics and an attractive valuation”.

As at the midday break on Tuesday, shares of the group were up S$0.02 or 1.2 per cent at S$1.68.

DBS is optimistic that the group’s net profit will increase on the back of steady revenue growth and easing utility cost pressure.

Highlighting that six Housing and Development Board (HDB)-located stores with “low competition nearby” are up for tender by year-end, DBS believes that securing a spot at these locations will present growth opportunities for Sheng Siong to deliver revenue per square foot on par with its existing stores.

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Sheng Siong expects to open at least two new stores by year-end and scale up its suburban HDB footprint, which enables it to enjoy low rental rates.

DBS estimates that each new store will be able to contribute S$14 million to the group’s top line and S$1.3 million to its bottom line upon full ramp up. This would translate to a mean incremental net profit per annum of S$3.8 million to S$6.4 million for Sheng Siong.

In addition, the research house anticipates electricity costs to normalise by end-2023 due to falling natural gas prices.

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This will amount to an estimated S$8 million in cost savings for FY2024, provided that natural gas prices remain at current levels.

“Given the continued decline in natural gas prices, we believe Sheng Siong is well-positioned to recontract at much lower rates when its utility contract expires at end-2023,” the research house said.

DBS believes that its forecast for FY2024, which assumes a S$9 million bottom-line growth, is “achievable”.