• 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.