• Maintain BUY and lower SGD1.86 TP from SGD1.96, 24% upside and 4% yield. We remain upbeat on Sheng Siong on the back of steady consumption demand and store opening opportunities going forward despite missing our 1H24 expectations slightly due to staff costs. We lower our FY24F-26F earnings by 6-7%, but expect demand to remain robust supported by the recently issued Community Development Council (CDC) vouchers to Singaporean households. The stock trades attractively at -1SD (c.17x) from its historical mean forward P/E of c.19x.

• 1H24 earnings below. Revenue came in at SGD714m (+3.3% YoY) while earnings rose 6.5% YoY to SGD70m – below expectations. Topline was within expectations, with growth largely led by SSSG, (+6% YoY), partly due to a longer run up to the Lunar New Year this year on 10 Feb (as opposed to 22 Jan last year). Annualised sales/sq ft in 1H24 was SGD2,234 (+1.6% YoY). 1H24 gross margin was in line at 30.1% – up 0.4ppts from 29.7% last year – from a better sales mix. EBIT stood at SGD81m (+6.1% YoY) – below expectations – due to higher-than-expected administrative costs led by elevated staff variable bonuses. Operating margins improved 0.3ppts to 11.3%, mainly on better gross margins. 1H24’s performance was largely in line except for higher-than-expected staff costs. This has resulted in a slight underperformance of earnings. Imputing staff costs at the current run rate, we have lowered our FY24F-26F earnings by 6-7%. An interim DPS of 3.2 SG cents was declared, amounting to a c.70% payout ratio. Due to our earnings cut, our TP is lowered by c.5% as we roll forward our valuation from 21x FY24F P/E previously to a blended FY24F-25F P/E.

• Expect outlet openings to be robust. SSG has met our store opening target of three for the year, having opened two new stores and awarded another new outlet in 1H24. The Housing & Development Board is expected put up another seven stores for tender in 2H24, including Tengah Garden Walk, Tampines Street 96, and Towner Road, which offer opportunities for SSG to increase its store network this year. Its sixth outlet in China opened in 2Q24 and all five existing outlets are profitable. We expect outlook to be positive, fuelled by positive consumption and supported by recent new round of CDC vouchers issued to every Singaporean household in the latest GST support package.

• 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 margins 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 in our view. Our TP includes a 2% discount to the intrinsic value, as SSG’s ESG score of 3.0 is below the 3.1 country median.

Source: RHB Research - 31 Jul 2024