• Sheng Siong's 1Q21 net profit of S$30.8m was in line at 28.4%/29% of our/consensus full-year forecasts; held up by robust GPM and other income.
• While we are heartened by Sheng Siong’s GP margins, store openings may only emerge in 4Q21F as HDB construction still faces delays.
• With few earnings catalysts in sight, we downgrade Sheng Siong from Add to HOLD. We lower our target price to S$1.60, based on 22x CY22F P/E (1 standard deviation above mean).

Sheng Siong Reported Satisfactory 1Q21 Results

• Sheng Siong Group (SGX:OV8)’s 1Q21 net profit of S$30.8m (+7.5% y-o-y) was in line with expectations, as we had forecast a S$29.7m profit for the quarter (1Q was 28.4%/29.0% of our/Bloomberg consensus forecast).
• Thanks to continued elevated demand amid the COVID-19 pandemic, Sheng Siong’s revenue rose 2.7% y-o-y to S$337.5m in 1Q21.
• The key positive was stronger GPM of 27.6% (+0.6% pt y-o-y), supported by
  1. higher sales mix in fresh food, and
  2. lower input prices during the quarter.

Elevated Demand to Taper Off; Tougher Comparison Base Ahead

• With the ramp-up of COVID-19 vaccination rollout, we expect further reopening of employees can now be at work, potentially causing home grocery expenses to normalise.
• We forecast Sheng Siong's SSSG to turn negative starting 2Q21F, and forecast revenue decline of 9.3% to S$1.26bn in FY21F.

Lowering Store Opening Assumptions Given Construction Delays

• Sheng Siong's management guided that one HDB expected more store openings in FY21F, but in view of construction sector delays, we now expect a slowdown in store openings in FY21F.
• Assuming Sheng Siong wins the upcoming bid, we estimate the new store to only contribute from 4Q21F onwards.
• We lower our forecast for store acreage addition to 5k sq ft in FY21F (25k previously); our FY21-23F EPS forecasts for Sheng Siong are lowered by 3.2-4.0% accordingly.

Downgrade Sheng Siong to HOLD; Target Price Lowered to S$1.60

• While we like Sheng Siong for catalyst in sight, we downgrade Sheng Siong from Add to HOLD. Our target price for Sheng Siong is lowered to S$1.60, now based on 22x CY22F P/E (1 standard deviation above its historical mean), from 25x previously.

• Upside risks include stronger-than-expected SSSG and cost control.
• Downside risks include deeper penetration of online grocery shopping.

Source: CGS-CIMB Research - 27 Apr 2021