Sheng Siong downgraded by UOB KayHian after in-line earnings

Sheng Siong supermarket in SingaporeSheng Siong supermarket in Singapore

UOB KayHian downgraded supermarket operator Sheng Siong to Hold from Buy, despite first-quarter earnings coming in largely as expected.

Sheng Siong reported on Friday that its first-quarter net profit rose 6.6 percent on-year to S$18.3 million, while revenue rose 5.1 percent to S$228.3 million; it attributed the profit rise to higher revenue and an improved gross margin, partly offset by higher operating expenses.

UOB KayHian also pointed to the first quarter’s same-store sales growth of 5.6 percent on-year as signaling better consumer sentiment.

But it said in the Monday note that the stock has rallied nearly 10 percent since it was upgraded to Buy in February. It tweaked its target price to S$1.09 from S$1.10 after lowering its 2018-20 net profit estimates by 1.0-1.2 percent as the latest two supermarket site wins were smaller locations than expected. It tipped an entry price of S$0.98.

That was similar to Daiwa’s comments on the earnings.

Daiwa said that first-quarter gross margin was strong at 26.2 percent, with the company attributing it to a better sales mix of more higher-margin fresh products as well as supplier rebates.

But it added in a note on Friday, that the stock was trading at a 2018 price-to-earnings ratio of 21.5 times and a forward dividend yield of 3.3 percent.

‘Competition risks’

“While we like Sheng Siong for its solid operational execution and as we forecast positive revenue growth in 2018 (up 4 percent year-on-year) as the company’s new stores should be able to offset the closure of its two largest stores in 2017, we remain wary of competition risks (from both traditional and online rivals), and as bidding for new store space could remain keen in the near term,” it said.

Daiwa stuck with a Hold call and a S$0.95 target price.

But DBS remained bullish on the stock, keeping a Buy call with a slightly higher target price of S$1.21, up from S$1.20.

Staying positive?

“There is still no let-up in performance,” DBS said in a note on Friday, adding that was despite the closure of two large stores and the threat from online shopping.

“This quarter showed resilience in revenue growth performance and margin expansion,” DBS said, noting that the net five new stores added since the third quarter of last year should drive growth ahead.

RHB was also positive on the stock.

“We believe the group would continue to enjoy the positive sales impact from the recovery in Singapore’s consumer sentiment,” RHB said in a note on Monday. “With four new outlets opened year-to-date, and two more that are scheduled to be opened in the second quarter of 2018, we believe the group could also deliver stronger results over the next three quarters.”

RHB said it expected Sheng Siong to win at least two new stores fro the 10 new sites the Housing Development Board (HDB) is putting up for bid this year.

It raised its 2018-20 earnings forecasts by 2-6 percent on a combination of the new store prospects and a stronger sales outlook and potential for higher margins. RHB raised its target price to S$1.18 from S$1.11, keeping a Buy call.

The stock ended at S$1.02 on Monday.