• 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.