Brokers’ take: RHB raises Sheng Siong target to S$2.04 on attractive valuations

RHB Research on Thursday (Jun 15) raised its target price on Sheng Siong to S$2.04 from S$2. It also maintained its “buy” call on the supermarket chain operator, as it believes valuations at current levels are attractive.

The new target price implies a potential 25.2 per cent upside from the counter’s last trading price of S$1.63 as at 2.55 pm on Friday. Shares of Sheng Siong were flat at the time.

The research house noted in its report that the group’s share price has declined along with the wider market, including the Straits Times Index. It said that although the group’s fundamentals “remain intact”, valuations are now one standard deviation below the mean of its historical forward price-to-earnings ratio of 16.9 times.

RHB also noted that Sheng Siong’s revenue held steady in the first quarter of 2023, outperforming the sector amid a year-on-year decline in Singapore retail sales. The group is also set to receive a full 12-month contribution from four new outlets opened in 2022.

“We therefore do not expect significant downside to our revenue forecasts,” said RHB analyst Alfie Yeo.

Due to Sheng Siong’s more diversified sourcing and sales mix enhancements, he projects the group’s gross margins to remain at levels close to 30 per cent. He also expects operating profit margins to be stable, as staff costs are “highly tied” to revenue performance.

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Yeo expects Singapore’s supermarket retail sales for the second half of 2023 to be more comparable to H2 2022, since they have normalised earlier than expected.

“We had expected supermarket retail sales to normalise around May, but they rose 0.6 per cent year on year and 0.1 per cent month on month in April,” he said. He does not expect any unanticipated demand shocks or abnormal year-on-year declines of more than 5 per cent for retail sales in the sector.