• Maintain BUY, new SGD1.87 Target Price from SGD1.72, 10% upside with 3% FY20F yield.
• Sheng Siong delivered outstanding 2Q20 results. PATMI surged 1.5x to SGD46m. We note that the exceptional earnings were the result of Singapore’s implementation of the “circuit breaker” in Apr-May 2020. We also expect sales growth to taper down, as Singapore moved into the second phase of reopening the economy.
• Nonetheless, the stock is likely to remain a favourite amongst investors, due to its resilient earnings and strong cash flow.

Sheng Siong's 2Q20 Results Beat Estimates Despite High Expectations

• Sheng Siong (SGX:OV8)'s 2Q20 PATMI surged 150% y-o-y, bringing 1H20 PATMI to SGD75m (+98% y-o-y) which met 75% of the Street’s full-year estimate. The strong earnings growth in 2Q20 was largely attributed to the 76% y-o-y jump in sales, which saw elevated demand during the lockdown.
• Sheng Siong also benefitted from the lockdown with market share gains, as most of its outlets are located in the residential estates. As a result, 2Q20 SSSG hit an exceptional high of +61% y-o-y. Gross margin also hit a record of 28.1%, on lesser promotions and an improved sales mix.
• Interim DPS doubled to 3.5cents.

Growth to Taper Down From Here on

• In view of the second wave of COVID-19 infections seen in other countries, we expect Singapore to take a cautious stance – with some of the work-from-home practises persisting into FY21F. As such, the demand for groceries should remain elevated compared to FY19 (pre-COVID days).
• That said, we believe it is unlikely for the group to replicate the stellar sales growth booked in 2Q20, due to the unlikelihood of another lockdown being implemented. We expect sales growth to moderate to 20-25% y-o-y in 2H20 – as consumers slowly switch back to dining out with the reopening of the economy, and on the stabilising number of COVID-19 cases in Singapore.
• We expect Sheng Siong's FY21 sales growth to dip slightly to 7% y-o-y, as new store openings (five new outlets in FY20F, and four in FY21F) should buffer against the effect of consumers no longer panic buying, and post-lockdown demand.
• We also project Sheng Siong's FY21 net margin to narrow to 8.6%, from 9.5% in FY20F – on the resumption of promotional activities, the absence of COVID-19 related grants, and a decrease in operating leverage.

Change in Target Price and Earnings

• We raise Sheng Siong's FY20-22F earnings by 22%, 14%, and 4%. This lifts our DCF-derived Target Price to SGD1.87. Although our implied FY21F P/E of 26.5x is higher than the regional peer average of 25x, we believe Sheng Siong should still be favoured for its defensive nature amid near-term market uncertainties.

Source: RHB Invest Research - 3 Aug 2020