• OVERWEIGHT; Top Picks: Sheng Siong (SSG) for stable earnings growth and DFI Retail Group (DFI) for a turnaround play. We maintain an OVERWEIGHT rating on the Singapore grocery retailer segment, with BUY calls on DFI and SSG. DFI's growth should be driven by its earnings recovery, while SSG's growth is to be led by new stores. Our FY23-26F earnings CAGR growth figures are: 5.2% for SSG and 19% for DFI. The sector's valuation of 13-17x FY25F P/E is compelling, with 4-5% dividend yields.
• 3Q24 numbers above estimates on better cost control and operating leverage. Grocery retailers chalked stronger-than-expected results as a result of their wider margins. SSG recorded a higher GPM and progressive wage credit grants from the Government, while DFI turned in better profitability on a better product mix and cost control, especially for its Singapore's food division.
• Sector growth driven by cost efficiencies and new outlets. DFI now has better cost control and less earnings drag from the disposal of Yonghui, driving earnings growth, while we see SSG's growth riding on higher store network and better consumer demand. We are upbeat on the sector's earnings, and margins going forward. On the back of 3Q24's better than expected margins, we have revised sector earnings by +2% for FY25F and +3% for FY26F. There was also a slight increase at the lower end of DFI's FY24 earnings guidance, supporting a more positive sector earnings.
• Supply of Housing & Development Board (HDB) supermarkets available for bidding is cooling down, but expect SSG's growth to be driven by its newly secured outlets. There is only one new HDB supermarket space that will be put up for bids within the next six months, and one other unit planned for the period beyond the next six months. As SSG already won a few new outlets last year, we expect growth for the group to be driven by these new outlets. Meanwhile, DFI's expansion should be driven by better operating efficiencies, as is rationalising its operating cost and outlets.
• Sturdy outlook for consumption. We expect consumption levels in Singapore to be firm. RHB economists estimate Singapore's 2025 GDP to grow by 3.0% YoY, supported by the manufacturing and services sectors and coming off a strong 4% YoY increase in 2024. This bodes well for consumption, as domestic industries recover and benefit from global demand becoming more robust. 2024 retail sales for supermarkets from January to November averaged 124 index pts (2017=100), outperforming the 122 pts recorded in 2023. This also points to a more positive supermarket consumption growth momentum.
• DFI is a BUY, due to its earnings recovery. We remain upbeat on DFI's earnings recovery expectations and attractive valuation. The profitability of its core operations has improved, while the recent divestment of Yonghui Superstores Co reduces future earnings risks. We anticipate an earnings recovery into FY25F. DFI's dividend yield is decent due to parent company Jardine Matheson Holdings' (JM SP, NR) practice of lifting dividends back to the group level. The stock currently trades at an attractive 13x FY25F P/E.
• BUY SSG for stable earnings. We like this grocer's earnings growth momentum, attractive valuation (near -1SD or 17x from its historical mean forward P/E of 19x), strong cashflow generation, stable balance sheet, and strong dividend payouts. Its FY25F growth will be led by new outlets.

Source: RHB Research - 21 Jan 2025