Maintain BUY and SGD1.78 TP, 11% upside and c.4% yield. Sheng Siong reported a resilient 1H22, with NPAT rising 2.1% YoY to SGD67.5m despite the economic reopening. GPM also improved to 29.4% from 28.2% despite rising inflation, substantiating its track record of maintaining margins in the face of rising costs. We believe inflation will cause consumers to be more cautious on spending, forcing them to focus on essentials and house brands, and/or cook at home more frequently, which should benefit SSG.
Resilient against inflation as proven in 1H22. Despite revenue sliding slightly by 0.7% YoY to SGD676.8m, mainly due to the June holidays – which led to an increase in travelling activities – GPM rose to 29.4% from 28.2%, while NPM rose to 10% YoY from 9.7%. This was on the back of surging inflation across the board on utilities, cost of goods and services (COGS), and manpower. This proves that SSG is able to raise prices and pass on costs to consumers, and that the company can maintain its margins, unlike many other types of businesses, in our view. SSG has also always been known as the “value” supermarket, and we expect some consumers to downgrade and switch to shopping at SSG as disposable income declines due to rising inflation. There is also an increasing trend of consumers switching to house brands for affordable value – this is beneficial for SSG, as it earns higher margins from house brands.
Dividends increased slightly to 3.15 cents. SSG declared an interim dividend of 3.15 SG cents/share in 1H22, an increase from 3.10 cents for 1H21. 2H will likely be even better for SSG, and we expect a yield of 4.1% for FY22F.
A resilient business, well-positioned to stay strong. We expect the rise in inflation and recessionary fears to be positive for SSG, as it should help mitigate any dampener stemming from Singapore’s border and economic reopening. We expect SSG to also be able to maintain margins and pass on costs to its customers, as it has previously done in the past – and proven as of 1H22. This counter presents a solid defensive option, especially in such volatile market conditions.
Using our in-house ESG methodology, we derived an ESG score of 3 out of 4 for this stock – which is on par with the median score of our Singapore coverage universe. As such, we apply a 0% ESG discount/premium to our TP.
Key downside risks: A price war, and a surge in operating costs.
