2Q22: Results In Line; Inflationary Pressure To Drive Demand For Groceries
SSG’s 1H22 net profit of S$68m (+2% yoy) was in line with expectations, forming 51% of our full-year estimates. 1H22 revenue fell 1% yoy as COVID-19 measures were lifted in 2Q22 but gross margin increased 1.2ppt to 29.4% on a better sales mix. As a result, gross profit rose 3% yoy. We believe SSG should continue to enjoy healthy demand for groceries as rising inflationary pressure will prompt more
consumers to dine at home. Maintain BUY and target price of S$1.91.
• Results in line with expectations. Sheng Siong Group (SSG) reported 1H22 earnings of S$68m (+2% yoy), in line with our expectation. Revenue fell by 1% yoy as COVID-19 measures were lifted in 2Q22, which led to increased outdoor dining and overseas travel. Comparable same store revenue in Singapore decreased by 2.4% yoy, while new stores added 0.9% yoy to total revenue. Contribution to revenue from China increased by 0.8% yoy with the addition of two new stores in 2H21.
• Record-high gross margin and higher dividend. 1H22 gross profit margin improved by 1.2ppt to 29.4% due to a favourable sales mix and we believe SSG is able to raise ASPs in an inflationary environment. SSG declared an interim dividend of 3.15 S cents, a 1.6% increase from the previous interim dividend of 3.10 S cents. We view this increase as a positive signal that future earnings should remain healthy.
• We believe SSG should continue to enjoy healthy demand for groceries as rising inflationary pressure will prompt more consumers to dine at home. Amid a cautious spending outlook, there may be belt-tightening from consumers to focus on essentials and to make price-conscious choices. Consumers may prepare meals at home more frequently or look towards house brand products for affordable value products to ease inflation and wallets.
• New store opening outlook. For the past two years, SSG has seen the supply of new HDB commercial space being affected for various reasons. However, this is expected to improve gradually. SSG seeks growth through the continuous expansion of its network of outlets in Singapore, especially in areas without presence, all in tandem with the ramp-up in supply of HDB BTO estates for 2022 and 2023. During 2021, SSG successfully secured leases for three stores. SSG targets to open 3-5 new stores per year for the next 3-5 years, focusing on areas that it does not have a presence in.
• SSG will continue to improve its operational efficiencies by ensuring a diversified source of suppliers to mitigate any potential disruptions, staying vigilant on performance of existing stores, focusing on core competencies and undertaking ongoing initiatives to automate work processes. This is to improve operational efficiency and increase gross margin.
• To continue to enhance its margin, SSG aims to improve sales mix of higher margin products, increase selection and types of house brand products, and derive efficiency gains from the supply chain.
• We maintain our earnings forecast.
• Maintain BUY with a target price of S$1.91, pegged to 2023F PE of 21x, or five-year average mean PE.
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• Higher-than-expected new-store openings and same-store sales growth.
• Higher dividends.