• Maintain OVERWEIGHT; Top Picks: Sheng Siong (SSG) for stable earnings growth and DFI Retail (DFI) for turnaround play. We stay OVERWEIGHT on Singapore grocery retailers with BUY calls on DFI and SSG. Growth for DFI is driven by the turnaround of Hong Kong and China operations, while SSG’s growth is to be led by new stores. Our FY23-26F earnings CAGR growth outlook is 5% for SSG and 13% for DFI. Sector valuation at 10-15x FY25F P/E is compelling with c.5-6% dividend yield.

• 1Q24 within expectations. There were no surprises in the 1Q24 results for the sector as both DFI and SSG tracked our earnings expectations. Revenues for DFI and SSG each grew by 2% and 6% YoY, led by consumption recovery at DFI and better festive sales and SSSG for SSG. Sector margins generally improved on cost control and better gross margins. As 1Q24’s earnings were tracking in line with our estimates, we leave FY24-26F forecasts unchanged.

• Sector on track for growth and recovery. DFI has seen better consumption at its convenience stores and health and beauty segments, while SSG is currently riding on higher store network and more robust consumer demand. Going forward, we expect recovery demand momentum for DFI and growth led by new stores for SSG to continue. Cost control measures are also currently in play at both DFI and SSG. We remain upbeat on the sector revenue, earnings, and margins going forward.

• Remain positive on stronger consumption, new supermarkets to contribute to growth going forward. We expect improving consumption going forward. Our economics desk estimates Singapore’s 2024 GDP growth forecast at 2.5%, on an improving external environment. We believe this should eventually translate into more positive consumption and income from the workforce, as domestic industries recover and benefit from a more robust global demand. YTD retail sales for supermarkets from Jan-Apr 2024 have already outperformed the entire 2023 at an average of 128 index points (2017=100) vs 122 points in 2023. On a four-month basis, the current YTD average of 128 points has also surpassed 2023’s 126.

• Four more HDB supermarkets available for bidding until May 2025. There continues to be supply for new Housing & Development Board (HDB) supermarkets, with three more new supermarkets up for bidding in the next six months, along with another planned before May 2025. The supply of HDB supermarkets this year has been robust and we believe both SSG and DFI will benefit from the robust supply with some of the outlet wins.

• BUY DFI for earnings recovery. We anticipate continued earnings recovery in FY24F as 1Q24’s interim performance and outlook is tracking in line with our expectations. Dividend yield is decent due to parent company Jardine Matheson Holdings’ (JM SP, NR) practice of uplifting dividends back to the group level. The stock currently trades at an attractive 10x FY25F P/E vs our implied target P/E of 15x.

• BUY SSG for stable earnings growth. We remain upbeat on SSG on the back of steady consumption demand and store opening opportunities. We expect tailwinds from strong SSSG over the Lunar New Year festive period and recently issued Community Development Council (CDC) vouchers to Singaporean households to drive growth. Valuation at -1.5SD (c.16x) from its historical mean forward P/E (c.19x) is attractive. The stock is also supported by c.4.6% FY25F yield.

Source: RHB Securities Research - 19 Jun 2024