Brokers’ take: Analysts mixed on Sheng Siong’s catalysts, but positive on FY2024

DBS Group Research and Phillip Securities have lowered their target prices on Sheng Siong , while RHB has raised its target price. They remain mixed on the grocer group’s valuations, but optimistic on its FY2024 growth prospects amid potential for new store openings.

On Monday (Oct 30), DBS Group Research lowered its target price to S$1.62 from S$1.76, and maintained its “hold” recommendation on the stock. The drop in target came after the research team applied a lower valuation peg on the counter.

Although DBS continues to like Sheng Siong for its operational excellence and potential tailwinds from cost improvement, it does not foresee any material near-term rerating catalysts.

Meanwhile, Phillip Securities cut its target price to S$1.80 from S$1.98, implying a potential upside of 19.2 per cent from the counter’s trading price of S$1.51 as at the midday trading break on Monday. Sheng Siong’s shares were up 2.7 per cent or S$0.04 at the time.

It maintained its “buy” call on the counter and left its estimations for FY2023 unchanged, it said in a separate report on Monday.

The research team noted that historical valuations had been “creeping downwards” due to a derating of growth expectations post pandemic. Sheng Siong is now trading at 20 times earnings, versus 22 times previously.

In contrast, RHB raised its target on the counter to S$1.99 from S$1.95, implying a potential upside of 31.8 per cent. It maintained “buy” on the stock.

The higher target came after the research team rolled over its valuation methodology from a blended price-to-earnings (PE) ratio of 21 times for FY2023-24, to a PE ratio of 21 times for FY2024. It left its earnings forecasts for FY2024-25 unchanged, as its outlook on Sheng Siong remains positive.

For RHB, Sheng Siong’s valuation remains attractive at one standard deviation below its historical mean PE ratio. The stock is also supported by a FY2024 yield of 5 per cent.

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It noted that Sheng Siong continued to show resilience during the latest quarter, with decent revenue and earnings growth despite a high base from last year’s earnings due to Covid-19 restrictions. The group also saw strong contributions from new stores amid a “firm consumption environment”.

On Oct 26, Sheng Siong posted a Q3 net profit of S$34.8 million, up 5.7 per cent from S$32.9 million for the year-ago period. Revenue rose 3.7 per cent on the year to S$345.8 million, from S$333.5 million.

The results were in line with the expectations of RHB and Phillip Securities. The latter noted the growth in Sheng Siong’s earnings despite spikes in salaries and an increase in electricity costs.

Analysts anticipate new store openings to drive growth for Sheng Siong.

Due to the large pool of Housing and Development Board leases up for bidding, DBS now believes the group will be able to open three new stores in 2024, versus its initial two-store prediction.

Phillip Securites, meanwhile, is expecting a larger roll-out of new stores, lower utility costs, a rise in interest income and stable gross margins.

“The inflationary environment has caused households to be more price-conscious. Sheng Siong benefits from its reputation as a value grocer. Maintaining market share is more critical than lower margins,” said Phillip Securities head of research Paul Chew.