• 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.

• 4Q20 revenue and earnings were within expectations, with full-year at 102%/101% of forecasts, excluding government grant. Final dividend jumped 67% to 3 cents per share.
• Revenue grew 28% YoY to S$319mn despite a gradual return of social and outdoor activities. Same-store sales growth in 4Q20 was 18%, 10-fold higher than 1.8% in
• FY21 earnings could be weaker following last year’s record sales triggered by pantry-loading and dine-home demand. We have modelled a 13% drop in revenue per sq ft for FY21e. Still, revenue should be 10% higher than pre-COVID levels. Expect grocery demand to be supported by dining at home and more households present in the country with international borders largely shut.
• FY21e PATMI and target price of S$1.71 Remains based on 25x PE, its 5-year historical average. Nevertheless, we raise the stock to ACCUMULATE from NEUTRAL as demand is still above trend.

The Positives

+ Healthy revenue despite re-opening. Revenue in 4Q20 was supported by same-store sales, which grew 10-fold vs. 4Q19’s 1.8% rise. New stores added another 10.6% points to growth.

+ Record cash flows and dividend hike. Net cash as at end-December ballooned to S$224mn from S$76mn in 4Q19. In FY20, SSG generated S$257mn of FCF, up from S$64mn in FY19. Final DPS was raised by 67% to 3 cents. Full-year dividend rose 83% to 6.5 cents for a payout of 70.5%.

The Negative

- Fewer store openings in 2021. Tendering of new stores by HDB has been temporarily suspended. There was only one tender for two HDB shops in 2020. There remains a pipeline of 20 stores to be awarded over the next 2-3 years but the timeline is unclear. The store in the Penjuru dorm stopped operations in March 2020 due to the pandemic. It was permanently closed in October 2020.

- Spike in administrative expenses. Administrative expenses jumped 63% YoY to S$57mn due to a S$12.8mn rise in staff costs for staff bonuses and additional headcount.

Outlook

FY20 revenue per sq ft was S$2,423. We are estimating S$2,100 for FY21e. This would still be 10% higher than pre-COVID’s S$1,916 in 2019. The higher revenue reflects the current trend of consumption and cooking at home. In addition, with international borders largely closed, the number of households in Singapore should remain higher than prior years. There is little clarity on whether home dining will sustain beyond FY22, after COVID. We have conservatively modelled weaker sales for FY22e. Our FY21e earnings are unchanged.

Upgrade to ACCUMULATE with unchanged TP of S$1.71

SSG’s investment merits remain its impressive 26% ROEs, dividend yields of 3.2% and net cash of S$224mn.

• 3Q20 earnings beat our estimates by 5% on the back of higher-than-expected same-store sales growth. Revenue rose 28.9% YoY to S$327mn. Net profit jumped 54% to S$31.8mn.
• Of the revenue growth, 20% points was from same-store sales (SSS) and 9% from new stores.
• With more time being spent at home, household cooking and eating should remain elevated, supporting grocery retailing. SSG’s positioning as an affordable and modern fresh-food store for the younger generation should enable it to take more wallet share from wet markets. We raise FY20e/FY21e net profits by 5%/4% to S$129mn/S$103mn. Our TP climbs to S$1.71 from S$1.65 with the rise in FY21e earnings. We use FY21e as it is more reflective of normalised earnings.

The Positives

+ Strong revenue, even with Phase 2 easing. Even as the lockdown eased with Phase 2 implemented on 19 June, revenue remained robust in 3Q20. Revenue expanded 28.9%, with around 20% points of the growth from SSS and 10% points from new stores opened in FY19/20. This testifies to households cooking and eating much more than pre-Covid 19 where the 5-year trend growth for supermarket sales was 1.3% p.a.

+ Record cash. Net cash as at September was S$180mn (3Q19: S$83mn). The huge YoY jump was due to S$218mn cash generated from operations. With a 70% payout, DPS in FY20e is expected to jump 70% to 6.1 cents.

The Negative

- Short hiatus in new-store openings. Due to the pandemic, HDB is temporarily freezing the award of new heartland stores. Tenders should resume in 2021 when new HDB BTO units are completed. Grocery stores are essential for neighbourhoods.

Outlook

The challenge for us is to fathom normalised supermarket sales, come FY21e. We think household spending will remain elevated with more home cooking.  Border closure and working from home is likely to perpetuate this behaviour change. Consumers are also embracing e-commerce, with the industry’s market share doubling to around 10% in 2020. Although management understands the value of this channel, efficiency, scale and high logistics or platform costs are still major barriers to profitability in grocery e-commerce.

Maintain NEUTRAL with higher TP of S$1.71, from S$1.65

We have used FY21e to benchmark our target. It is more reflective of a normalised year for earnings. We believe investment merits of 28% ROEs, dividend yields of 2.9% and net cash have been priced into the stock for the near-term.

• 2Q20 revenue and earnings beat our estimates. 2Q20 PATMI surged 150.4% YoY to S$46.1mn. 1H20 dividends doubled to 3.5 cents.
• Revenue surged 76% YoY from pantry loading and more cooking at home following the circuit breaker on 7 April. Same-store sales leapt 61% YoY in 2Q20.
• 2Q20 gross margins touched a record high of 28.1%, supported by lower promotions.
• Our FY20e revenue and earnings are raised 29% to S$122mn. Revenue and margins triggered by the pandemic were higher than expected. We also incorporated the grants from the government. We expect sales to remain vibrant in 2H20 due to households dining more at home and convenience of Sheng Siong stores compared to peers. We are downgrading our recommendation from ACCUMULATE to NEUTRAL. Our target price is pegged to FY21e (rather than FY20e) as a barometer to normalised earnings.

The Positives

+ 76% YoY jump in 2Q20 revenue. Revenue was driven by a 61% spike in same-store sales.  Another 13% points growth came from new stores, in line with the 8% increase in-store footprint to 553k sft.

+ Gross margins record high of 28.1%. Product mix between fresh and groceries was relatively stable. The reason for the record high margins in 2Q20 was the absence of promotions. In effect, more effort was on replenishing the shelves.

+ Huge cash pile. Sheng Siong net cash stands at S$222mn (1H19: S$83mn). Apart from the record earnings, there were other timing considerations such as delayed payment of dividends and taxes. A drag to cash was inventory as the company stocked up in event of any possible disruption in the supply chain.

The Negative

- Slower roll-out of new stores. In 1H20, Sheng Siong opened two stores in 1H20, with another three expected in 2H20. The five new stores will add 42.5k sft of retail space, an 8% rise. Any further award of HDB stores is expected to be delayed in 2H20 due to the pandemic.

Outlook

We expect demand to remain elevated in 2H20. The pantry loading of essentials in 2Q20 is over but the surfeit demand should sustain due to more in-home dining by households. On gross margins. It should normalise to around 27% levels as promotions return. The convenience of Sheng Siong HDB stores, close to neighbourhood centres, has been another support to shopper traffic.

Downgrade to NEUTRAL with higher TP of S$1.65 (previously S$1.58).

We look to peg our target price to normalised earnings. As a result, we benchmark our valuations to our FY21e earnings estimates.