• Maintain BUY with new SGD1.95 TP from SGD2.04, 21% upside and 4% yield. We remain upbeat on Sheng Siong despite 1H23 earnings underperforming slightly. We see growth fuelled by more new outlets given SSG is capable of securing some of the new Housing Development Board (HDB) pipeline supermarkets up for tender in the next six months. Its valuation remains attractive, close to -1SD from its historical mean forward P/E at c.17x. The stock is supported by c.4% FY24F yield as well.

• 1H23 earnings slightly trailing. 1H23 earnings of SGD65m (-3% YoY) trailed our estimates slightly. Revenue of SGD690m (+2% YoY) was within expectations, with sales growth driven by new stores, while SSSG declined by 1%. SSG continued to deliver sales growth against normalising Singapore supermarket retail sales which has declined YoY from Jan to May 2023 due to a high base last year. While gross margin improved 1.5ppts to 29.7% on better sales mix, operating margin was lower than expected (11% vs 12%) due to higher utilities and staff costs. Finance income was also better than expected, which helped to buffer our earnings expectations. Apart from the higher-than-expected opex, SSG’s sales performance has been encouraging, given the normalising trend of Singapore’s supermarket retail sales in 1H23. An interim dividend of 3.05 SG cents was declared, amounting to a payout ratio of 70%.

• Trim FY23F-25F earnings by 4-5% each. We have left our revenue estimates largely unchanged since revenue expectations were in line. However, we have factored in the higher-than-expected opex and lower operating margin to reflect higher staff and utilities costs in 1H23, offset by better sales mix, gross margin and higher interest income assumptions. Our TP, based on blended FY23F-24F P/E, is lowered to SGD1.95 accordingly.

• Outlook still positive with HDB’s robust supermarket pipeline. We remain positive on SSG as we see growth continuing to be led by new stores. HDB has a pipeline for six new supermarkets outlets up for tender over the next six months, with five more lined up beyond the next six months till 2024. We expect SSG to secure some of these outlets which will eventually supplement growth.

• Key downside risks to our EPS estimates include slower-than-expected store openings, lower sales demand and per sq ft traction, and the inability to maintain gross profit margin at current levels. However, we expect SSG’s performance to remain resilient as it targets the mass market value segment, which will enjoy effects of downtrading in a soft consumption environment.

• ESG. As SSG’s ESG score is 3 out of 4 – on par with the country median – we apply a 0% discount/premium to its intrinsic value to derive our TP.

Source: RHB Research - 28 Jul 2023