• We are now more positive on Sheng Siong (SGX:OV8)’s FY21F earnings as we factor the proposed government spending packages in Budget 2020. While 4Q19 earnings was within our estimate, the Care and Support Package handout to Singaporeans and the Stabilisation and Support Package for companies will boost grocery consumption and earnings through higher government grants.
• We have raised our FY20-21F earnings by 3% each to reflect
  1. additional government grants in FY20F and
  2. revenue uplift from grocery vouchers given out to low income Singaporean families.
• Maintain BUY with 13% total return including 3.1% dividend yield.

4Q19 Results Within Expectations

• Sheng Siong's revenue grew 11.8% y-o-y to S$248m with operating profit and net profit coming in at S$20.0m (+6.7%) and S$17.4m (-0.9%), within expectations. Revenue growth was driven by new stores as same store sales (SSSG) was up 1.8% and the quarter’s annualised sales per square foot rose 1.9% to S$1,973. China operations remain profitable.
• A final DPS of 1.80 Scts was declared, equivalent to 70% payout rate.

Gross margins stable:

• Gross margins remained stable at 27.2% (+0.1 ppt y-o-y) with higher supplier rebates and better sales mix of higher margin fresh food but was dragged by higher pork costs as a result of the swine flu.

Operating margins lower:

• Operating expenses increased by 14.4% y-o-y to S$47.4m, with operating margins falling by 0.4ppt to 8.1%. Distribution expense doubled y-o-y to S$2.7m and Admin expenses increased by 11% y-o-y to S$44m on higher headcount, bonus provision from higher sales volume and larger store count.
• Other expenses increased to S$0.7m (+28% y-o-y) due to higher finance charges relating to credit cards and other digital payment modes.

Strong outlook with new stores driving growth.

• New stores have driven most of the growth in FY19 with stronger than average sales per square feet performance. Sheng Siong has since 4Q17 opened a total of 15 new outlets, with five new outlets and more that 30,000 sqft of space established in FY19. These stores will contribute to a full 12 months in FY20F.
• The recent two new outlets (18,000 sqft Aljunied and 9,000 sqft Tampines outlets) along with a higher store count and retail area, will add to FY20F growth.

Earnings Boost From Budget 2020

Stabilisation and Support Package will ease Sheng Siong’s operating costs.

• The Finance Minister delivered Budget 2020 earlier this week with economic support packages that will benefit Sheng Siong’s earnings. Under the Stabilisation and Support Package, the
  1. Enhanced Wage Credit Scheme;
  2. Jobs Support Scheme;
  3. Corporate Tax Rebate,
  4. half-month rental waiver on commercial tenants in government managed properties
• is positive to Sheng Siong in terms of easing pressure on its operating expenses. We see the Jobs Support Scheme and rental waiver as two of the most significant cost relief measures. We estimate the cost relief package amounts to S$1m for Sheng Siong.

Care and Support Package will aid revenue growth.

• We expect higher consumption under the Care and Support Package for Singaporeans to lead to higher revenue. Sheng Siong will benefit from higher purchasing power of consumers under the S$1.6bn Care and Support Package. This includes grocery vouchers handed out low income families, cash payouts, Service & Conservancy Charges, U-Save rebates, workfare income supplement, Passion Card Top ups, which could all boost spending and consumption in the economy and the grocery retail sector.
• With close to 20% market share in Singapore’s modern grocery retail market, we can expect more robust revenue growth going forward.

We Believe Sales Through COVID-19 Period Would be Firm

Expect slight benefit from COVID-19 situation:

• We believe that with the COVID-19 situation, consumers are avoiding crowds, leading to loss of F&B foodservice spending. This would signify a shift to delivery services and supermarket spending. We anticipate supermarket sales to remain firm.
• During SARS in 2003 when general retail sales fell, supermarket sales picked up and that could also be the case for 1Q20.

Maintain BUY, With Higher Target Price and Earnings

Raised FY20-21F earnings by 3% each.

• We have raised our revenue for FY20-21F in view of higher than expected store count and floor area especially the new Aljunied outlet which will take up 18,000 sqft. With already two new outlets in the bag early in the year, we increased our FY20F new store assumption from three to four.
• In addition, we anticipate revenue growth to be robust supported by additional demand from grocery vouchers that will be handed out to low income Singaporean families.
• For FY20F, we have imputed S$1m benefit to pretax profit from the government support packages:
  • Enhanced Wage Credit Scheme;
  • Jobs Support Scheme;
  • half-month rental waiver on outlets rented from HDB and other government agencies.
• We have also imputed corporate income tax rebate of S$15,000 for FY20F. This led us to raise FY20-21F earnings by 3% each.
• With our higher earnings estimates, we raised our target price to pegged to 25x FY20F earnings. We like the stock for its defensive qualities including robust growth in FY20F, stable earnings, net cash balance sheet, cash generating abilities, and decent dividend yield.
• Upside is 13% including dividends.
• Maintain BUY with higher Target Price of SGD 1.45.

Source: DBS Research - 21 Feb 2020