• Sheng Siong's strong 1Q20 performance boosted by COVID-19 demand.
• Exceptionally strong SSSG at +19.7% for the quarter.
• Raised FY20F earnings by a marginal 1% on slightly stronger revenue projections.

Strong Performance Due to COVID-19

• Sheng Siong (SGX:OV8) turned in an exceptionally strong quarter for 1Q20 with revenue growing 30.7% y-o-y and earnings by 53.9% to S$329m and S$29.8m respectively. Sales was boosted by both new stores and SSSG which grew by +9% y-o-y and +19.7% respectively.
• While revenue was stronger than expected, gross margins of 27% was in line with expectations.
• Operating expenses enjoyed some operating leverage with EBIT margins increasing by 1.3ppts to 9.6%, before recognising COVID-19 government grants. Grants amounted to S$1.6m, largely support packages for COVID-19.

Shift in Food Consumption From F&B Foodservice to Supermarkets in Play

• We had earlier anticipated a shift in food spending from F&B Foodservice into supermarkets and the strong results posted by Sheng Siong is a validation that of our investment thesis and stock call.
• In fact, revenue and earnings growth outpaced our expectations slightly and to account for the minor outperformance, we have raised our revenue for FY20F. This results in a marginal increase in earnings.
• Among the changes to our forecast assumptions, we have raised our SSSG for the year to 10% (from 8%), which is still way below the +19.7% recorded for 1Q20. We expect 2Q20’s SSSG will still be exceptionally high due to the circuit breaker period effective 7 April and extended to 1 June, and enhanced measures. This should see a further shift in consumption to supermarkets triggered by closure of standalone snack, dessert, and confectionery stores.

Maintain BUY, With Slightly Higher Target Price of S$1.58

• We continue to be positive on Sheng Siong for its exposure to Singapore grocery consumption. Our Target Price based on 25x FY20F PE is slightly higher at S$1.58 after imputing slightly higher sales growth projections.
• Maintain BUY for 11% upside including dividends.
• A longer than expected COVID-19 situation will be a catalyst for further upside to sales and earnings.

Source: DBS Research - 29 Apr 2020