• Maintain BUY and TP of SGD2, 13% upside with c.4% FY23F yield. Sheng Siong’s 1Q23 results are within expectations. It continued to generate cash flow and expand its store network during that quarter, and defied the odds against the normalisation in Singapore supermarket retail sales. The stock is still trading below its historical P/E mean of 19x. Our TP is based on 21x FY23F P/E.

• 1Q23 numbers are in line. SSG’s revenue of SGD357m (-0.4% YoY) and earnings of SGD33m (-5.3% YoY) are in line, at 25% and 23% of our full- year estimates. Both annualised sales per square feet (SGD2,326, -6% YoY) and SSSG (-3.6%) declined, largely due to the high base of 1Q22 when more stringent COVID-19 restrictions were still in place. However, we expect this to normalise in the coming months. Revenue growth was flattish despite Singapore supermarket retail sales normalising – Jan 2023 (-0.8% YoY) and Feb 2023 (+12.7% YoY) – led by contributions from five new stores (+3.6%). In 1Q23, SSG also expanded its network to 68 outlets, vs 67 outlets at end-Dec 2023. GPM ticked up by 0.1ppt to 28.8%, but this was a tad lower than the 29.3% recorded in 2H22 – as it held more promotions and gave more discounts during the Lunar New Year period. Its EBIT margin remained flattish YoY at 12.2%. Cash flow improved, with SGD16m of cash generated from operations and SGD7.6m of net cash generated after financing and investments.

• Earnings growth on track. SSG remains largely on track to meet our revenue and earnings estimates, as well as store opening assumptions. We see more new outlets coming on-stream, as it continues to bid for new outlets stemming from the acceleration of Housing and Development Board (HDB) projects after a slowdown during the COVID-19 pandemic. We also expect SSG to benefit from more down-trading in an environment of slower economic growth – as some shoppers will switch from higher-end supermarkets and F&B food service formats to mid-income segment supermarkets. As such, we still like SST for its growth potential, strong cash generation and defensive earnings. We maintain our estimates.

• Key downside risks include slower-than-expected store openings, lower sales demand and per square feet traction, and the inability to maintain GPM at current levels.

• ESG. As SSG’s ESG score is 3 out of 4 – on par with our country median – we apply a 0% discount or premium to its intrinsic value to derive our TP. To update, there is now greater focus on the E pillar due to critical climate change issues. As such, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 2 May 2023