<Results Analysis>2Q22 results: Easing COVID measures but gross margins hit record, inflation could be second wind
- 2Q/1H22 performance within expectations; 2Q/1H net profit -8.1%/ +2.2% y-o-y
- 1H22 profit accounts for 54% of FY22F; gross margins hit record high of 30.2% in 2Q22
- Higher interim dividend of 3.15 Scts declared vs 3.0 Scts last year
- Second wind as inflationary environment swings consumers toward in-home dining, value products; maintain BUY with TP of S$1.76
Sheng Siong Group (SSG) 1H22 net profit +2.2%, within expectations. SSG reported 1H22 net profit of S$67.4m (+2.2% y-o-y) on the back of a 0.7% y-o-y dip in revenue to S$676.8m. For 2Q22, revenues dipped by 7.4% y-o-y to S$318.8m while net profit was at S$32.3m, -8.1% y-o-y.
High base last year due to progressive COVID-19 tightening in 2Q 2021. Recall that Singapore underwent tightened restrictions from late April 2021 as infections from COVID-19 increased in the community. This caused a high base effect with the shift towards in-home consumption in 2Q21, as dining-in ceased and work-from home was the default mode. As a result, comparable same-store sales growth (SSSG) for its Singapore stores logged a negative 2.4%, but this was partially negated by new store opening in Singapore (+0.9%) and China (0.8%). Notwithstanding the dip, SSG’s 2Q/1H22 results were within our expectations.
Gross margins continued to march up to 29.4% in 1H22, breached 30% for 2Q22. Despite the inflationary cost pressures, SSG gross margins for 1H inched further up to 29.4%, an improvement of 1.2ppts from 1H21. In fact, 2Q22 gross margins hit a record high of 30.2% (+2ppts from 2Q21), a level not seen before. This was attributed to changes in sales mix, which we believe could be attributed to its focus on fresh as well as house brands.
Network of 70 stores, and growing. As of 30 Jun 2022, SSG has a network of 70 stores, of which 66 are in Singapore and 4 in China, up from 65 the same period a year ago. In Singapore, the new stores contributed S$7.0m to 1H22 revenue. Compared to the same period a year ago, an additional 2 new stores were also opened in China, Kunming in 2H 21. According to the Group’s announcement, its subsidiary in China continues to be profitable. The Group indicated that it will continue to look to expand its retail network, particularly in estates in which it has no presence.
Interim dividend of 3.15 Scts vs 3 Scts last year. An interim dividend of 3.15 Scts was declared, marginally higher than last year’s 3 Scts. This was marginally above our expectations.
A credible set of results. Despite a high base in the past two years – when the Group benefitted from the pivot to in-home consumption arising from COVID-19 restrictions – SSG managed to turn in higher profits in 1H22. While 2Q22 showed a dip, this came about from the easing of restrictions from 26 April this year, which unleashed a surge in social activities and out-of-home consumption. We believe SSG could have a second wind in their sails in this high inflationary environment.
Potential beneficiary with surging inflation and spending pattern changes. We maintain our view that the current inflationary price pressure may cause consumers to ease back on social activities post the initial surge, and be more discerning in spending, shifting back towards home dining and value-for-money products as per our earlier survey in May shows (Singapore Inflation vs Consumers: Tug-of-war – who wins?).
Maintain BUY; TP: S$1.76. At half time, SSG 1H22 net profit is at 54% of our FY22F forecasts, compared to 50% during pre-COVID. This was partially helped by a good 1Q22 performance since COVID-19 restrictions were still in place then. We are maintaining our forecasts for now, though there could be some minor upward bias in our forecasts on the back of higher gross margins and/or sales growth. At current price, the counter’s projected dividend yield is at 3.9%, based on our expectations of a 6.15 Scts dividend per share for FY22F.