Sheng Siong Group - Staying Home, Eating at Home; Reiterate BUY

Date: 29/04/2020

Source  :  RHB
Stock  :  Sheng Siong       Price Target  :  1.63      |      Price Call  :  BUY
        Last Price  :  1.62      |      Upside/Downside  :  +0.01 (0.62%)

  • Sheng Siong (SGX:OV8)’s 1Q20 results significantly exceeded our expectations. Sales surged 31% y-o-y to SGD329m while PATMI jumped 48% y-o-y to SGD28.7m – a historical record high.
  • Additionally, management said demand remains elevated since Singapore raised COVID-19’s risk assessment to Disease Outbreak Response System Condition (DORSCON) Orange in February.
  • We are still positive on Sheng Siong, as we expect a robust 2Q20, in light of the circuit breaker measures.

Extraordinary Sales in Extraordinary Times

  • The stellar earnings in 1Q20 were largely driven by heightened sales. Sheng Siong saw stronger Lunar New Year sales in early 2020 on improving consumer sentiment. Subsequently, the change of COVID-19’s risk assessment to DORSCON Orange triggered the first spate of panic buying. Consequently, SSSG surged 19.7ppts – the highest in Sheng Siong’s listed history.
  • New stores opened in 2019 and 1Q20 also contributed 9ppts to sales growth, while the second store in Kunming, China, added another 2ppts. This brought total sales growth to 30.7% y-o-y.

Other Boosters to Earnings

  • Sheng Siong's 1Q20 GPM increased by 0.9ppts to 27%. Management attributed this to an elevated sales mix of house brands, which carry higher margins. Diversified sourcing of non-fresh products – to cope with higher demand – also reduced input prices for Sheng Siong.
  • Sheng Siong received additional SGD1.3m of government grants too during the quarter, mostly from employees’ wage support schemes and rental waivers announced in Budget 2020.

2Q20 Earnings Likely Stay Exceptional

  • We saw another round of panic buying when the Government announced the circuit breaker measures in early April. On top of that, these measures have led to more residents staying at home, which has increased the demand for food at home. The closure of non-essential businesses has also shifted retail patterns to supermarkets from specialty stores.

Still Our Top Pick

  • We raise our FY20F earnings by 14% while keeping our FY21-22 forecasts largely unchanged. This raises our DCF-based Target Price to SGD1.63.
  • We now expect Sheng Siong to deliver 28% earnings growth on a full-year basis. We believe sales and earnings growth will start to taper down once the circuit breaker is lifted – it is currently expected to lift after 1 Jun.
  • Nonetheless, we believe grocery demand will remain elevated, as restrictions are expected to be wound down gradually.
  • Furthermore, Singapore is expected to enter a recession this year. The deterioration of the economy is also likely to support more grocery over foodservice retail during the course of 2020.

Source: RHB Invest Research - 29 Apr 2020

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