Proving its worth
- 4Q21 PATMI increases to S$32.5m (+6.6% y-o-y) as gross margin sets another record high
- 3.1 Scts dividend proposed for 2H21, bringing FY21 dividend to 6.2 Scts
- Three new stores and margin expansion to offset demand normalisation
- Maintain BUY with higher TP of S$1.76
Investment Thesis:
Change in consumption patterns to support sales psf. Numerous reports have found that there is a shift in consumption patterns to focus on “value for money”, following the economic toll caused by COVID-19. We believe this is positive for Sheng Siong, as the brand resonates the “value” proposition in Singapore, which should support sales psf, even as demand normalises. Accordingly, we have projected sales psf to remain c.24% above pre-COVID levels in FY23F, which implies that future store expansions will be more profitable.
Emerging dividend play. Based on the current share price, Sheng Siong remains a good dividend play with a yield of c.4% per annum. Our forecasts show that the group is on track to pay a dividend of over 5.90 Scts/share in FY22F, which would represent a yield of c.4%.
Margin improvement could mitigate headwinds. We believe Sheng Siong’s efforts in improving margins (through the pursuit of fresh food and house brand sales growth) could mitigate inflationary pressures and a normalisation in demand. Indeed, the group has achieved successive q-o-q margin improvements since 3Q20, with it rising from 27.0% to 29.4% in 4Q21.
Valuation:
Maintain BUY with a higher TP of S$1.76 based on Sheng Siong’s pre-COVID PE multiple of 21.0x, which represents the stock’s pre-COVID average forward PE. We expect supermarket sales to gradually normalise in FY22 as Singapore transitions to “living with COVID-19”.
Where we differ:
Our estimates are above the consensus, as we believe normalisation will take place at a slow pace with Singapore’s transition to living with the pandemic.
Key Risks to Our View:
Higher input costs such as energy expenses and excessive promotions by competitors could result in lower margins.