Reiterate BUY and SGD1.76 TP, 7% upside with c.4% yield. We continue to like Sheng Siong for its defensive features, strong cash flow-generating ability, net cash balance sheet, attractive dividend yields, and stable earnings driven by store network and margin expansion. SSG is trading at sub-18x forward P/E, at -0.5SD from its historical mean. Our TP is based on 19x FY23F P/E.
Still driving GPM expansion. The company’s GPM expanded over the past five years, from 26% in 2017 to 30% in 3Q22. Bulk handing, tilting its sales mix towards fresh products, directly purchasing from sources, and the growth of its house brands (to a lesser extent) have all helped to drive GPM growth. Over the past two years, the COVID-19 pandemic has also led to SSG diversifying its supply sources which helped to expand GPM. We do expect SSG to book slightly wider GPMs moving into FY23-24 and have imputed this into our corresponding estimates.
Outlook for new supermarket outlets available for tender remains positive. The Housing and Development Board’s outlook for new supermarket leases remains positive, on the back of both new and matured housing estates’ development. There are four new supermarkets – with floor area of 5,000-6,000 sq ft each – at Punggol, Yishun, Clementi, and Toa Payoh that are up for tender in the next six months. We conservatively forecast the addition of two new outlets for SSG each year, in FY23 and FY24.
Trim FY23-24F earnings by 5% each, on the back of normalisation. We recalibrate our earnings forecasts to reflect further the post-lockdown economic reopening and normalisation of supermarket sales activities going forward. As such, our FY23-24F earnings are now lower by 5% each, from SGD145m and SGD150m to SGD139m and SGD144m. While our GPM assumptions were raised slightly due to diversifying supply sources, we also moderate our store opening outlook and sales psf assumptions to below all levels recorded during the phases of FY20-21’s “circuit breaker”.
Still BUY and SGD1.76 TP after imputing an ESG premium of 0% for its 3.0 ESG score, which is based on our in-house proprietary methodology. Despite lowering our earnings estimates by 5%, SSG is still trading at an attractive -0.5SD from the historical mean P/E. Our TP is based on 19x FY23F P/E, at +0.5SD from the historical mean and reiterate our BUY call on this stock.
