Broker's take: Phillip upgrades Sheng Siong to 'buy' on record Q3 gross margins

PHILLIP Securities has upgraded its call on Sheng Siong Group to "buy" from "accumulate" with an unchanged price target of S$1.69, based on a 5-year historical average of 25 times price-to-equity as well as FY2022 earnings projections which remain unchanged.

Phillip's upgrade comes after Sheng Siong reported record gross margins of 29 per cent for Q3 of 2021, with its latest set of quarterly results beating the research house's estimates.

In a Monday (Nov 1) report, analyst Paul Chew highlighted Sheng Siong's growing market share in fresh food from wet markets amid the recent spike in Covid-19 cases, which he sees as a secular trend.

Commenting on the group's Q3 FY2021 financials released last Thursday, he observed a surge in fresh food sales after the closure of Singapore's Jurong Fishery port and Pasir Panjang wholesale centre, in addition to generally cautious wet market consumer sentiment.

"Worries over the rising cases and wet market setting led to households' preference to source fresh food in supermarkets. Sheng Siong avoided the fresh food disruption by sourcing more fresh food directly from suppliers," noted Chew.

Its ability to source directly and diversely, scale in procurement, as well as frequently refresh and deliver inventory are some of the competitive advantages which Sheng Siong enjoys in the fresh food supply chain, he said.

Chew has consequently raised his revenue and Patmi (profit after tax and minority interests) estimates for FY2021 by 15 per cent and 11 per cent, respectively.

He now projects gross margins for the full year to reach 28.3 per cent, which is 0.5 percentage point above what was previously forecasted.

"Sheng Siong enjoys attractive return-on-equity of 25 per cent, dividend yields at 3.2 per cent and net cash at S$215 million as at Sept 2021. Uncertainty over normalised earnings post-pandemic and lack of new stores are some of the near-term headwinds for the share price," said Chew.

"Rising prices in the current inflationary period may be beneficial for Sheng Siong due to its reputation as the cheapest grocery chain (in Singapore)," he added.

Shares of the group were trading at S$1.43 as at the midday break on Monday, up S$0.01 or 0.7 per cent.