RHB Group Research analyst Jarick Seet has kept a “buy” rating on supermarket operator Sheng Siong with an unchanged target price of $1.78.
“We expect Sheng Siong to still chart strong numbers for 2QFY2022 ended June, despite a potential slowdown due to the June holidays, when more people travelled abroad,” says Seet. “In the longer term and as inflation rises, the company is well-positioned as a value-for-money supermarket chain, and should be a key beneficiary of the lifting of Covid-19 restrictions.”
The analyst is optimistic that Sheng Siong will be able to maintain its margins by raising prices to pass on costs, as seen in past instances. The way Seet sees it, this counter presents a solid defensive option, especially in volatile market conditions in recent times.
“This might turn out to be a net positive for the company, as the increase in cost per item will lead to a larger net spend per customer,” says Seet. “As such, Sheng Siong should be able to preserve its gross profit margin (GPM), while widening its net profit margin (NPM).”
Seet is confident that inflation will outweigh the negative impact of the economic reopening, as once the ‘hype’ of travelling and reopening of food and beverage (F&B) and leisure outlets dies down, coupled with a potential recession, more people are likely to stay home and have economical food choices like home-cooked meals.
Over the past two years, Sheng Siong has seen the supply of new Housing and Development Board (HDB) commercial space being affected for various reasons – although this is expected to improve gradually, according to Seet.
In 2021, the company secured leases for three stores. Management aims to open three to five new stores per year for the next three to five years, focusing in areas where it does not have a presence.
Some key risks the analyst considers include a potential price war and a surge in operating costs.
On the whole, Seet expects the rise in inflation and recessionary fears to be a positive factor for Sheng Siong, which will help to mitigate any dampener stemming from Singapore’s border and economic reopening.
As at 9.37am, shares in Sheng Siong are trading at 1 cent up or 0.62% higher at $1.61.