Brokers' take: Best is over for Sheng Siong as supermarket dash eases, analysts say

ANALYSTS are removing Sheng Siong Group from their shopping carts, as the supermarket operator's earnings retreat from the year-ago high base.

Sheng Siong last year saw a surge in its top line amid a supermarket dash for groceries and essentials at the start of Singapore's "circuit breaker" to curb Covid-19 infections.

However, the group reported an 11.9 per cent drop in net profit to S$65.9 million for H1 ended June 30, as revenue fell 8.8 per cent off the high base a year ago to S$681.7 million.

The group's revenue had jumped 52.7 per cent for H1 2020 on elevated demand due to the pandemic.

The way Maybank Kim Eng analyst Kareen Chan sees it, Sheng Siong's "best days are over".

The research house is initiating coverage on Sheng Siong with a "sell" recommendation and a target price of S$1.33.

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"(Sheng Siong is) unlikely to see another windfall year as more people will dine out as the ban should be lifted in Q4 once vaccination rate passes 80 per cent in the city," Ms Chan said.

Over at RHB, analyst Jarick Seet agreed that Sheng Siong's net profit and revenue are likely to continue to dip from the year-ago high base as Singapore's vaccination rate increases.

"We expect future sales and profitability to further normalise as we resume normal economic activities, especially when borders reopen and more people resume their travel plans," Mr Seet said.

RHB is downgrading Sheng Siong to "neutral" from "trading buy" and slashing its target price by S$0.34 to S$1.61.

The new target price is based on an estimated price-to-earnings ratio of 23 times for FY2022, as RHB lowers its earnings forecast by 6 per cent for FY2021 and by 5.5 per cent for FY2022.

Meanwhile, Phillip Securities is trimming its target price slightly to S$1.69, from S$1.71 previously, but maintaining its "accumulate" call on the back of record-high gross profit margins in Q2.

"Gross margins of 28.9 per cent (in Q2) were the highest by far, surpassing their previous high of 28.1 per cent at the height of the pandemic in Q2 2020 due to pantry loading," said analyst Paul Chew.

Sheng Siong's gross profit margin hit 28.2 per cent for H1, up 0.6 percentage point from the six-month period a year ago.

"Margin expansion was driven by a higher mix of fresh-food sales and house brands," Mr Chew said. "Gross margins at 28 per cent could be the new norm as fresh foods and house brands gain further traction."

At the same time, the analysts see limited-term catalysts for Sheng Siong due to the lack of new store openings so far this year.

"Sheng Siong typically opens three to five new outlets each year, but this pace should slow down this year due to the slower pace of construction, and previous delays in building activities causing job backlogs to pile up," said RHB's Mr Seet.

Maybank KE's Ms Chan noted that new store openings had been a significant driver for Sheng Siong over the past few years.

"With tapering demand and slower increase in new store opening, we forecast FY2022 earnings per share (EPS) to decline 7 per cent year on year," she added.

Shares of Sheng Siong fell by S$0.03 or 1.91 per cent to close at S$1.54 on Monday.

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