• Maintain BUY and TP of SGD1.78, 10% upside with a 4% FY22F yield. We believe that inflation will cause consumers to have lower disposable income. This could lead them to spend more cautiously and lean towards prioritising more essential items. Consumers may also focus on store brands or cook at home more, which should strengthen Sheng Siong’s revenue and margins. In addition, downtrading may happen and shoppers could turn to more value-friendly supermarket chains like SSG to get their groceries.

• Resilient and defensive. SSG’s 2Q22 revenue slipped by 0.7% YoY to SGD676.8m – mainly due to the June school holiday period (when families travelled more). GPM for the quarter rose to 29.4%, from 28.2% in 1Q22, while NPM rose to 10% YoY from 9.7% in 1Q22. This was on the back of surging inflation, which also pushed up utilities, COGS and manpower costs. As such, its performance proves that SSG was able to raise prices and pass on costs to consumers – it also maintained margins when many other types of businesses saw profitability decline. Also, as SSG has always been known as a more budget-friendly supermarket chain, we think some consumers may downtrade and shop at its stores instead of other more “premium-branded” chains like Cold Storage, NTUC FairPrice and Jason’s – since disposable income tends to decrease when inflation picks up. In such an environment, consumers are also more apt to switch to store brands, which often offer more affordable items.

• DPU increased slightly to SGD0.0315. SSG declared an interim dividend of SGD0.0315 per share in 1H22, marking an increase from SGD0.031 for 1H21. We believe that 2H22 may bring about even better dividends, and forecast a yield of 4% for FY22 (FY21: 3.8%).

• Blue skies ahead. We believe the rise in inflation and recessionary fears should be a positive for SSG’s sales – and this should help to mitigate any dampener stemming from Singapore’s border and economic reopening. We also expect SSG to also be able to maintain its margins and pass on costs to customers, as it has previously done so 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 proprietary 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 or premium to our intrinsic value to derive our TP.

• Key downside risks: A price war, and a surge in operating costs

Source: RHB Research - 5 Sep 2022