• We believe Sheng Siong Group (SGX:OV8) should continue to enjoy healthy demand for groceries as rising inflation will push more consumers to dine in at home. This should offset the reduced demand from the easing of COVID-19 restrictions.
• Sheng Siong’s ability to grow its gross margin consistently is good evidence of its ability to pass on rising costs and a better product mix. We raised our 2022-24 EPS forecast for Sheng Siong by 4%. Upgrade Sheng Siong to BUY after rolling over our valuation base year to 2023.

Inflation Pushing More Consumers to Dine in at Home

• Despite the tapering off of demand from the easing of COVID-19 restrictions, we believe Sheng Siong Group should continue to enjoy healthy groceries’ demand.
• On the back of inflationary pressures, consumers are increasingly concerned with the higher cost of living, and may choose to dine in more at home to reduce excessive spending. This may continue to support groceries’ demand at the supermarkets.

Steadily Growing Gross Margin a Strong Testament to Ability to Pass on Costs

• Sheng Siong Group’s steadily growing gross margin is a good evidence of its ability to pass on rising costs. We believe that given the consumer staples nature of Sheng Siong Group’s products, it will likely be able to raise prices quickly to pass on costs and preserve margins.
• In addition, the demand for higher margin fresh products should continue to grow as these are the main products required for cooking at home.
• All in all, the increase in item costs coupled with the ability to maintain gross margin should translate into higher earnings moving forward. To recap, Sheng Siong Group’s 1Q22 gross profit margin improved by 1.0ppt to 28.7% due to a favourable sales mix.

Supermarket Industry’s Retail Sales Continued to Record M-o-m Growth in May 22

• According to the latest retails sales index published by Singstat on 5 Jul 22, the supermarkets’ and hypermarkets’ retail sales continued to record a 0.6% m-o-m growth. The m-o-m growth is noteworthy as this is achieved amid a major relaxation of Singapore’s COVID-19 public health measures, which took effect from 26 Apr 22 where there will no longer be a group size limit for mask-off activities and safe distancing requirement.
• Although the growth is marginal vs the 10.3% decline y-o-y, we note that the y-o-y data is not an accurate comparison as in May 21, the group size for dining-in was capped at five and eight persons in the first two weeks respectively and dining-in was suspended from 16 May 21 as part of the Phase 2 Heightened Alert measures. However, in May 22, there were no dine-in restrictions for vaccinated persons.

New Store Opening Outlook

• For the past two years, Sheng Siong Group has seen the supply of new HDB commercial space being affected for various reasons; however, this is expected to improve gradually. During 2021, Sheng Siong Group successfully secured leases of three stores.
• Sheng Siong Group targets to open 3-5 new stores per year for the next 3-5 years, focusing in areas that it does not have a presence in.
• Sheng Siong Group will continue to build on its e-commerce capabilities in areas where it does not have a physical presence in, so that it can provide customers better accessibility to its products.

Sheng Siong Group - Earnings Forecast Revision & Recommendation

• We raise our 2022-24 earnings forecast for Sheng Siong Group by 4% after raising our revenue for 2022-24 by 4% to account for a stronger demand in groceries as more consumers choose to dine at home to reduce excessive spending amid a rising inflation environment. We are roughly annualising the 1Q22 earnings as we believe the strong earnings momentum will continue into the rest of the year.

• Upgrade Sheng Siong to BUY with a 13% higher target price of S$1.91, pegged to 2023F P/E of 21x, or 5-year average mean P/E. We roll over our valuation base year from 2022 to 2023.

• Catalysts:

  • Higher-than-expected new store openings and same-store sales growth.
  • Higher dividends.

Source: UOB Kay Hian Research - 13 Jul 2022