• Keep BUY, new SGD1.96 TP from SGD1.99, 25% upside. We remain upbeat on Sheng Siong with growth fuelled by new outlet wins and better consumption on higher purchasing power from the Budget 2024 announcement. We expect new store openings to be robust on the Housing & Development Board’s (HDB) healthy pipeline of new outlets. Valuation at -1SD (c.17x) from its historical mean forward P/E (c.19x) is attractive. The stock is also supported by c.4% FY24F yield.

• In-line FY23 earnings. Revenue and earnings of SGD1.4bn (+2% YoY) and SGD134m (0% YoY) were within expectations. New stores have continued to lead growth, with revenue growth driven by six new stores (opened in FY22- 23) at +2.5% YoY. SSSG was flat. Annualised sales/sq ft was SGD2,231 (-1.4% YoY), ie slightly below last year’s SGD2,262. Gross margins grew by 0.6ppts to 30% on a better sales mix. Operating margins declined 0.7ppts to 11.4%, mainly on lower other income and supplier rebates. Opex and net margin of 9.8% were in line with our forecast. A final 3.2 SGD cents dividend was declared, bringing full-year dividends to 6.25 SGD cents, with the dividend payout ratio amounting to c.70%. As there were no surprises for FY23, we have kept our FY24F-25F earnings largely unchanged.

• We expect growth to be led by new stores. HDB has a pipeline of five new supermarkets outlets up for tender over the next six months, with eight more lined up beyond the six months till end 2024. We expect Sheng Siong to secure some of these outlets and assume three outlets pa in our forecast assumptions, adding to the 69 stores it has currently.

• Sheng Siong is a strong beneficiary of the recent budget announcement, which will help boost consumer purchasing power and consumption, in our view. Enhancement to Assurance Package and other handouts include: i) SGD600 Community Development Council (CDC) vouchers for all Singaporean households; ii ) SGD200-400 cash Cost of Living Special Payment for eligible adults; iii) one-off rebates on U Save, Service, and Conservancy Charges for eligible HDB households; iv) SGD200 in LifeSG credits for national servicemen; v) personal income tax rebates; vi) changes in property tax; and vii) a GST Voucher Fund top-up to defray GST expenses for lower and middle income households. We expect Sheng Siong to directly benefit from the improved purchasing power of consumers, especially the ability to use CDC vouchers for supermarkets.

• Key downside risks to our EPS estimates include slower-than-expected store openings, lower sales demand and per sq ft traction, and the inability to maintain gross profit margins at current levels. However, we expect Sheng Siong’s performance to remain resilient as it targets the mass market value segment, which will enjoy effects of downtrading in a soft consumption environment. We apply a 2% discount to TP as its ESG score of 3.0 is below the 3.1 country median.

Source: RHB Research - 29 Feb 2024