Brokers' take: RHB expects rising inflation to boost Sheng Siong’s topline, upgrades to 'buy'

RHB on Tuesday (May 24) upgraded Sheng Siong : OV8 0% to “buy” from “neutral” as it expects rising inflation to boost the supermarket operator’s topline as consumer expenditure normalises.

The research team has also raised its target price on the stock to S$1.78 from S$1.51, after lifting its FY2022 estimates on profit after taxation and minority interests by 17 per cent. At S$1.78, Sheng Siong would trade at 19 times RHB’s estimates for FY2022 earnings.

The new target price represents a potential upside of 16.3 per cent from Sheng Siong’s trading price of S$1.53 as at 10 am on Tuesday. The counter was up 0.7 per cent or S$0.01 at the time.

RHB analyst Jarick Seet views Sheng Siong as a “defensive option” for investors, especially during such volatile market conditions.

Inflation pressures may also outweigh “euphoria” related to the economic reopening. As euphoria related to travel and the reopening of F&B and leisure outlets wears off, consumer expenditure levels will likely tone down as people are likely to stay home and have more home-cooked meals, Seet said.

“Sheng Siong, well-positioned as a value-for-money supermarket chain, will be a key beneficiary of this normalisation,” he added.

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Moreover, Sheng Siong will likely be able to raise prices to pass on costs while preserving margins, as it has done so in the past when prices rose, RHB noted.

“The increase in the cost per item will lead to a larger net spend per customer. As such, Sheng Siong may maintain its gross processing margin, while widening its net profit margin, looking ahead,” Seet said.

In contrast, UOB Kay Hian (UOBKH) on Monday downgraded DFI Retail Group to “hold” from “buy” as it believes the Asian retail giant’s earnings will remain “highly subjective” to unpredictable government policy in the near to medium term.

The research team has also slashed its target price to US$2.87 from US$3.65, representing a potential upside of 4.4 per cent from DFI’s midday trading price of US$2.75 on Tuesday.

The drop in target price comes as the research team slashed its earnings estimates by 14 to 48 per cent for 2022 to 2024. It noted the biggest impact to be seen in FY2022 as DFI accounts for the Q4 2021 losses from its Yonghui Supermarkets associate.

DFI on May 19 released a bearish Q1 business update, citing a “high level of uncertainty” for the remainder of the year. This was likely the result of headwinds from China’s strict lockdown measures and the inclusion of Yonghui’s losses in its 2022 numbers.

“We had expected a turnaround in the company’s fortunes in 2022, but the imposition of strict lockdowns throughout China has delayed the normalisation of the company’s fortunes,” said UOBKH analyst Adrian Loh.