• Sheng Siong's 3Q20 earnings within estimates, growth driven by SSSG of 19.1% y-o-y.
• Supermarket sales remain elevated as Singapore remains in Circuit Breaker Phase 2.
• Expect supermarket sales to remain robust as Singapore proceeds cautiously into Phase 3.

Sheng Siong's 3Q20 Within Estimates, Revenue Driven by Restricted Activities and Stay Home Demand in Phase 2

• Sheng Siong (SGX:OV8)'s 3Q20 earnings of S$31.8m (+54.4% y-o-y) was in line with our expectations. Revenue of S$327m (+28.9% y-o-y) was driven by strong Same Store Sales Growth (SSSG) of 19.1% as Singapore remained in Phase 2 of the Circuit Breaker.
• Although Singapore retail sales for supermarkets have come off the peak in April-May, demand remains elevated as consumers continue to stay and cook at home as not all activities have resumed in Phase 2. Sales per square feet is strong at S$2,368 (annualised) vs S$1,998 in FY19 due to the Circuit Breaker. New stores sales grew by just 10% y-o-y.

Gross Margins Flat, Operating Margins Improved

• Gross margin was 27%, largely unchanged from 3Q19, led by better fresh food mix, more house brand sales, diversified sourcing and steady selling prices.
• Sheng Siong's operating margins improved on lower distribution and admin expenses.

Supermarket Sales to Remain Robust on Cautious Transition to Phase 3

• As Sheng Siong is on track to meet our full year estimate, our earnings forecast is largely unchanged. We expect earnings to normalise as we head into Phase 3 and beyond, on absence of panic buying and Circuit Breaker in April and May. Hence, our earnings expectations for FY21F is lower y-o-y.
• We assume Sheng Siong's sales on a psf basis will moderate to S$2,100 next year from our expectation of S$2,350 for this year. We see a cautious transition into Phase 3 as a vaccine has yet to be found. This would mean that some of the workforce will continue to work from home.
• F&B Foodservice sales will remain subdued, supporting better than normal supermarket sales. As such, we expect 4Q20 earnings to be robust as well.

Maintain BUY on Sheng Siong

• Sheng Siong is a direct beneficiary of COVID-19, with close to full exposure to consumers staying home and social distancing. Long term earnings growth is driven by improving market share at the expense of wet markets. Sheng Siong's share price currently trades at under +1SD of its four-year historical mean. Our target price for Sheng Siong is based on 25x FY21F earnings.
• We continue to like Sheng Siong for its defensive earnings, strong balance sheet, cashflow generation capabilities and strong exposure to Singapore’s supermarket consumption. Maintain BUY for 15% upside.

Source: DBS Research - 30 Oct 2020