• FY23 revenue and PATMI were within expectations at 99%/99% of our forecast. Revenue growth was 2.1% YoY. Same-store sales contracted and new-store expansion was muted.
• For 2023, Sheng Siong only expanded with two new stores or a footprint growth of 1.7% (2022: +5.4%). The lack of new stores will weigh on revenue growth this year. The company aims to expand a minimum of three stores or equivalent 2.4% expansion per year.
• Same-store sales growth is expected to improve as outbound travel normalises. Inflationary pressure will also support more dining at home. The company has secured two stores so far this year in Singapore, with another ten likely to be tendered. We marginally lower our FY24e earnings by 2%. With a more sluggish growth outlook, we lower our target valuations from historical 20x PE to 18x. The target price is reduced to S$1.66 (prev. S$1.80). Until new stores accelerate, growth will be muted.

The Positives

+ Rise and rise of margins. Gross margins have been on an upward trajectory since listing. A decade ago, gross margins were 23% in FY13 and now stand at 30%. Scale, distribution centre, direct sourcing, and fresh food mix have been the major driver of margin expansion. The new driver is house brands. Competitors have also been raising prices to pass on their cost of production.

The Negatives

- No new stores. There were no new stores this quarter, and only two were opened this year. Expansion in new stores is a cumulative 8% over three years. Before this lull, new stores grew 7-8% p.a. The lack of new stores was due to fewer tenders made available. Of the five stores tendering in 2023, Sheng Siong has been successful in securing three.  

• 3Q23 results were within expectations. 9M23 revenue and PATMI were 75%/74% of our FY23e forecast. Despite, the spike in salaries and electricity cost, PATMI grew 6% YoY on improving gross margins and interest income.
• Same-store sales in 3Q23 grew 1.8% YoY, inching up from 2Q23 by 1.5%. We believe the improvement is from market share gains. Visible promotions in the community and a reputation as a cost leader helped push revenue growth.
• We expect higher earnings growth in FY24e from new stores, lower utility costs, increase in same-store sales and interest income. Our FY23e earnings and BUY recommendation is maintained. However, we are lowering our target price to S$1.80 (prev. S$1.98). Historical valuations have been creeping downward from 22x PE to 20x PE. Post- pandemic there has been a de-rating of growth expectations.

The Positives

+ Same-store sales building momentum. We have seen same-store sales turning since 2Q23. Momentum has crept up to 1.8% YoY in 3Q23, from an estimated 1.5% YoY in 2Q23. Same-store sales is rising from market share gains and a jump in population in Singapore.

+New stores recovering. SSG added one new store in Yishun. There are three more stores pending award by HDB. Thereafter, there are another 5 stores in the pipeline by HDB over the next six months.

The Negative

- Operating expenses jumped S$6.1mn YoY. The introduction of a progressive wage model and higher utility costs drove up operating expenses by S$6.1mn (or 10% YoY). Despite higher wages, the number of staff at 3200 is similar to pre-pandemic levels. Utility cost is expected to decline in FY24e.

• 2Q23 results were within expectations. 1H23 revenue and PATMI were 50%/48% of our FY23e forecast. Despite record gross margins, PATMI was down 0.4% YoY due to a jump in wages and utilities.
• After four quarters of decline, revenue grew 4.7% YoY in 2Q23. We estimate growth was driven by new stores (+3.5% pts) and same-store sales (+1.5% pts).
• New stores, recovery in same-store sales, interest income and higher gross margins will support earnings. But any improvement will be offset by a jump in operating expenses led by utilities and wages. Our FY23e expectations are a modest 1.5% earnings growth. No change to our FY23e earnings and target price of S$1.98, pegged to 22x PE, a 10-15% discount to the 5-year historical average of 25x PE. We upgrade to BUY from ACCUMULATE due to the recent performance of the share prices.

The Positives

+ Same-store sales back to growth. After four quarters of decline, we estimate same-store sales rose 1.5% YoY in 2Q23 (1Q23 -3.6% YoY). We believe market share gains and household budgets returning to home dining drove the improvement in same-store sales.

+Gross margins climb to record levels. 2Q23 gross margins rose to a record 30.6%. The drivers to higher margins were leaner inventory relative to peers (especially in fresh products) and lower purchasing costs. The supply chain was less disrupted and fuel costs were falling. Sales contribution from private labels and fresh is relatively stable as a percentage of sales.

The Negative

- 2Q23 operating expenses jumped 13% YoY. The re-contracting to higher electricity expenses and increased wages, caused operating expenses to rise 13% YoY or S$8mn. Opex to revenue nudged up 1.3% points to 20.1%. Higher wages from the progressive wage model and tight labour conditions will keep fixed costs elevated. An offset will be the lower variable wages or staff bonus.

• 1Q23 results were within expectations. Revenue and PATMI were 26%/25% of our FY23e forecast. PATMI declined 5.3% due to higher operating expenses namely electricity and staff cost.
• Sales were generally stable, despite a 3.6% fall in same-store sales growth. New stores contributed to 3.6% points of revenue growth.
• Revenue growth is still normalising post-re-opening. The weakness in same-store sales has improved from a decline of 3.6% in 1Q23 to 1H22 negative 7.0%. Higher electricity expenses of an annualised S$10mn will be a significant drag on operating margins in FY23e. The offset will be higher interest income. We maintain our FY23e earnings. But downgrade our recommendation from BUY to ACCUMULATE due to the recent performance of the share prices. The target price is maintained at S$1.98. Valuation is pegged to 22x PE, a 10-15% discount to the 5-year historical average of 25x PE. New stores remain the source of growth as tendering activity picks up pace.

The Positive

+ New stores and interest income supported earnings. New stores added 3.6% points of growth to revenue. There was 1 new store added in late March this year and another is under review. Available for tendering by HDB are another 11 stores till 2024. Finance income spiked by S$2.3mn YoY in 1Q23 to S$2.7mn. SSG’s cash hoard is benefiting from higher interest rates. The cash is parked in fixed deposits.

The Negative

- Lagged negative effects of inflation. Electricity expenses increased by S$2.4mn YoY in 1Q23. The new utility rates were signed at the end of last year. The total drag on earnings compared to last year can be an annualised S$10mn. Wages also experienced a S$1.5mn YoY rise in 1Q23, in part due to the progressive wage model but most of the wages are variable.

Outlook

We forecast modest growth in FY23e. The negative same-store sales growth from re-opening and household dining out will filter out for the rest of the year. New stores be the main engine of revenue growth. Gross margin will be supported by increased contribution of house brands and supplier support.

China was a modest 0.4% points drag in sales in 1Q23. Sales declined due to more consumers dining out with the re-opening. The focus is on fresh products and convincing customers to shop away from the wet markets. SSG can be the one-stop shop for all their requirements. Another key focus is building up the pool of human capital to operate the stores.

• 4Q22 results were within expectations. Excluding a one-off marketing rebate of S$6mn, FY22 revenue and PATMI were 101%/100% of our forecast.
• Sales was supported by the return of new stores. The number of new stores increased by three to 67 and raised retail area by 5.4% in FY22.
• We expect growth in FY23e to be driven by new stores. We model 3 to 4 new stores per year. Our expectations are GP margins will be stable, supported by house brands. With re-opening and dining out, fresh food sales mix may hit the ceiling in the near term. A future catalyst will be China. Contribution is small currently with 4 stores, but we expect a planned roll-out to 15-20 stores to achieve scale. We raised our FY23e earnings by 6% to S$135.4mn on more resilient margins and a higher store count. Our BUY recommendation is maintained. The target price is raised to S$1.98 (prev. S$1.86). Valuation is pegged to 22x PE, a 10-15% discount to the 5-year historical average of 25x PE. The re-opening will have a dampening impact on same-store sales in the near term.

The Positive

+ Back to new stores for growth. There were net 3 new stores in FY22 (4 were opened and 1 closed). In comparison, FY21 saw only 1 store opened. The target remains to open 3 to 5 stores. With HDB ramping up the construction of flats there is more visibility in news stores. There are 13 new stores up for bidding until 1H24. Separately, the average size of the store is also larger with a minimum of 5,000 sft.

The Negative

- Gross margins may hit a ceiling temporarily. 4Q22 gross margins were stable at 29.2%. It remains resilient compared to pre-pandemic levels of around 27%. The ability to raise the mix of fresh food has been the key driver to margin expansion. We believe Sheng Siong has taken market share from wet markets. The next phase of margin expansion will come from house brands. More SKUs are being added.

• 3Q22 revenue and PATMI beat expectations. YTD22 revenue and PATMI were 78%/82% of our FY22e forecast.
• Same-store sales declined 7% YoY in 3Q22, as it was a tough base year. In 3Q21 Jurong Fishery Port and Pasir Panjang Wholesale Centre closure diverted huge fresh food sales to Sheng Siong stores. The four new stores added 2.6% points of revenue growth.
• We lift FY22e earnings by 5% to S$127.8mn. The increase in GST from 1 January 2023 could also pull some sales into 4Q22. Our BUY recommendation is maintained. The target price is unchanged at $1.86. Valuation is pegged to 22x PE, a 10-15% discount to the 5-year historical average of 25x PE. Revenue is normalising post-relaxation of COVID-19 restrictions but at a run-rate around 25% higher than the pre-pandemic period. We believe Sheng Siong’s strength in fresh food continues to drive its grocery market share.

The Positives

+ Still healthy margins. The higher contribution from fresh food helped Sheng Siong (SSG) margins to creep up. The ability to manage fresh food effectively from direct sourcing to processing (meat/seafood) in the stores gives SSG the edge over peers, in our opinion. Food inflation has also seen the downgrading by consumers into SSG higher margin house brands. To cater to the store expansions, SSG will need a larger distribution centre with more automation and specialised equipment

+ Store roll-out normalising. This quarter SSG added a new 10,000 sft store in Margaret Drive. Meantime there was a closure of a 5,000 sft Yishun store. The increase in the store footprint in 3Q22 was 5.5% YoY. A new 6,000 sft store in Sanja Valley will be added in 4Q22. This will increase total sft in FY22e to 608k sft, a 5% rise. Expectations are for 3 to 5 new stores per annum over the next five years.

The Negative

- Weak same-store sales. 3Q22 same-store sales are down 7.2% YoY. It is the 2^nd consecutive quarter of decline in same-store sales and accelerating from the 2Q22 5% decline. Since the relaxation of COVID-19 control measures in April, we expect less home dining as household activities normalise.

• 1H22 PATMI beat expectations at 59% of our FY22 forecast. Gross margins surprised on the upside, a record 30.2% in 2Q22 (2Q21: 28.8%).
• Revenue is beginning to contract with the relaxation of social and work restrictions. Grocery demand will soften with less home dining post-pandemic. A 5% net increase in store footprint will be supportive of revenue in 2H22.
• We are lifting our FY22e earnings by 6%, from higher gross margins. Our BUY recommendation is maintained. The target price is lifted from S$1.75 to S$1.86, due to higher earnings. Valuation is pegged to 23x PE, a 10% discount to the 5-year historical average of 25x PE. We expect revenue to normalise in FY22e/FY23e, placing downward pressure on growth. New store openings of three to five per year, rising market share and improving gross margins will help stem part of the earnings decline.

The Positives

+ Record gross margins, again. Despite rising food inflation, SSG has managed to raise gross margins due to a higher sales mix of fresh food sales. SSG’s competitive edge or pricing in fresh food stems from direct sourcing from overseas exporters, ability to reduce wastage from repackaging and repricing, value add from fresh food specialists and tactical purchasing due to seasonality or dislocation in the supply chain.

+ Store expansion resumes. No change in management guidance of opening 3 to 5 new stores per year over the next three to five years. There will be three new stores opened this year. 1H22 saw the opening of two stores (April, May) of 20k sft. Another new store in Margaret Drive will be opening in August.  However, the net increase in footprint in 2H22 will be only around 5k sft, including the closure of a store on a private lease. There are four stores currently at the bidding stage.

The Negative

- Same-store sales contracted. Same-store sales fell 5% YoY in 2Q22. It is the first such decline since 3Q19. We expect the contraction to continue into 2H22.

Outlook

A transition year is underway as grocery demand normalises from less dining at home. New stores, rising market share and improving gross margin will help mitigate some of the decline in sales. With only 66 stores, there is a runway to double the footprint as the largest competitor in Singapore has around 200 stores.

• 1Q22 revenue/PATMI was within expectations at 28%/31% of our forecast. We have modelled a decline in sales in 2H22.
• Margins continue to climb. The 28.7% gross margin in 1Q22 is the highest for a festive laden quarter where promotions are more prevalent.
• We maintain our FY22e earnings. Our BUY recommendation and target price of S$1.75 are unchanged. Our valuation is pegged to 23x PE, a 10% discount to the 5-year historical average of 25x PE The reopening of borders and group restrictions is expected to reduce home dining. This will negatively impact the consumption of groceries. The return of Malaysian workers who were temporarily residing in Singapore is another potential loss of customers. A possible implication of rising inflation is consumers downgrading to home dining or shopping more in value grocers such as Sheng Siong.  FY22e will be a transition year but valuations have turned more attractive and the resumption of new store openings will help drive earnings growth.

The Positives

+ Gross margins keep rising. A higher mix of fresh food drove margins higher, again. SSG’s strength is in meat and seafood. There is a higher level of complexity in handling these items than fruits and vegetables due to their higher value and level of freshness and perishability.

+ Guiding three to five new stores per annum. In 2021, SSG added only 1 new store. The company is guiding 3 to 5 new stores per year over the next three to five years in HDB housing estates. There are another 17 locations planned to be opened in such estates over the next three years.

+ Same-store sales accelerated. Same-store sales accelerated in 1Q22 to 4.7% YoY. This is faster than 2H22 3.6% YoY. Pre-pandemic, same-store sales grew at 0.1% in 2019 and a negative 1% in 2018.

The Negative

- Nil

Outlook

Borders reopening, lifting of dining restrictions and the return to office will result in less dining at home and grocery shopping.  Alternatively, higher grocery prices could lead to consumers shifting more to value grocers or home dining. The secular trend of taking market share from wet markets remains intact. The three new stores will contribute to growth this year as they add another 24.5k sft of space or a 4% increase in total footprint.

Maintain BUY with unchanged TP of S$1.75

SSG’s attractive financial metrics include ROEs of 27%, dividend yields at 3.6% and net cash at S$254mn (as at Mar2022).

• FY21 revenue/PATMI beat our estimates at 102%/105% of our forecast. Gross margins were stronger than expected. Excluding grants, PATMI would have risen 41% YoY.
• Improvement in the product mix of higher fresh food and house brands drove the expansion in margins. Households continue to dine at home and shift their fresh food purchases from wet markets to supermarkets.
• Our FY22e PATMI is increased by 13% to S$114.7mn as we lift sales estimates by 12%. We believe the secular trend of fresh food sales migrating from wet markets to supermarkets continues. Our BUY recommendation is maintained and target price is nudged up to S$1.75 (prev. S$1.69). We lower our valuation metrics to 23x PE, a 10% discount to 5-year historical average of 25x PE. Earnings growth will be capped until new stores contribute meaningfully, likely in FY23e. FY22e will be a transition year as household dining may soften as borders reopen, dining restrictions lift and more return to office.

The Positive

+ Gross margins still climbing. Margins hit another record high of 29.4% (3Q21: 29.0%). Supporting margins was the higher mix of fresh food and house brands. We believe the disruption last quarter in fresh food supplies diverted even more customers to Sheng Siong.  Awareness is growing on the quality and price competitiveness of fresh food compared to wet markets. A similar experience is underway for house brands where more SKUS are being added particularly in the frozen category.

+ Three new stores secured. After almost five quarters without a new store, Sheng Shiong managed to open a new 5,500 sft store in Bukit Batok. Another two more stores, totalling 19,000, sft are expected to open in FY22. This will raise Sheng Siong’s total store footprint in Singapore by 4.3%.

The Negative

- Nil

Outlook

We expect sales in FY22e to soften as borders reopen, dining restrictions lift and more return to office. Dining more at home also results in a larger budget for higher quality and pricier fresh products. We expect only a modest dip in gross margins. Sales from fresh products can creep up higher with further market share gains from wet markets. A headwind will be rising food cost and price competition.

Maintain BUY with higher TP of S$1.75 (prev. S$1.69)

SSG enjoys attractive ROEs of 27%, dividend yields at 3.7% and net cash at S$241mn (as at Dec2021).

• 3Q21 revenue and PATMI beat our estimates. 9M21 revenue and PATMI at 85%/91% of forecasts. Gross margins was a record 29%.
• The closure of Jurong Fishery port and Pasir Panjang wholesale centre resulted in a surge in fresh food sales. Cautious consumers in visiting wet markets was another trigger.
• We raised FY21e PATMI by 15% to S$126.9mn. FY21e revenue forecast is lifted 11% and gross margins increased by 0.5% points to 28.3%. Our FY22e forecast is unchanged. The recent spike in cases is accelerating Sheng Siong’s market share in fresh food from wet markets. We believe this is a secular trend. Our target price is unchanged at S$1.69, based 5-year historical average of 25x PE. The target price is based on FY22e earnings, to reflect more normalised earnings as borders re-open. Upgrade to BUY from ACCUMULATE due to recent weakness in share price.

The Positive

+ Another record in gross margins. Gross margins touched a record 29% in 3Q21. Driving up margins was the higher contribution of fresh products. Closure of Jurong Fishery port and Pasir Panjang wholesale centre shrunk fresh food supply in wet markets driving up demand in SSG stores. Worries on the rising cases and wet market setting led to households preference to source fresh food in supermarkets. SSG avoided the fresh food disruption by sourcing more fresh food directly from suppliers.

The Negative

- No new stores this year. SSG has not secured any new stores this year. There are plans for six new stores to be bid out by HDB in 2022. The recent relaxation of foreign workers may aid in the faster build-out of HDB units and quicken the timeline in bidding out new supermarkets.

Outlook

Lack of new store openings this year will dampen sales growth in FY22e. However, SSG competitive edge in managing their fresh food supply chain can elevate gross margins higher than pre-pandemic levels. Ability to source directly and diversely, scale in procurement and frequent refreshing and delivery of inventory, are some of the competitive edge SSG enjoys in fresh food. We believe the secular trend to shop in supermarkets away from wet markets has accelerated due to the pandemic. Rising prices in the current inflationary period may be beneficial for SSG due to its reputation as the cheapest grocery chain.

Upgrade to BUY from ACCUMULATE with unchanged TP of S$1.69

SSG enjoys attractive ROEs of 25%, dividend yields at 3.2% and net cash at S$215mn (as at Sep2021). Uncertainty over normalised earnings post-pandemic and lack of new stores are some of the near-term headwinds for the share price.