+ 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.
– 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.
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.