Sheng Siong upgraded to Outperform by Daiwa

Sheng Siong Supermarket in Singapore’s Little India area; taken October 2018.Sheng Siong Supermarket in Singapore’s Little India area; taken October 2018.

Daiwa upgraded Sheng Siong to Outperform from Hold, saying the risk-reward balance has turned more favorable and there’s opportunity to increase its store count.

Daiwa raised its target price to S$1.19 from S$1.04 after increasing its operating margin estimates, leading to a 3.6 percent increase in earnings per share (EPS) forecasts for 2020-21.

“Despite its solid operational execution, our previously cautious stance on Sheng Siong had been predicated on industry headwinds — competitive and cost pressures, consumption slowdown — negatively impacting its performance,” Daiwa said in a note Friday.

“However, with a significant pick-up in its new store opening momentum, we see clearer visibility on earnings growth,” it added. Amid industry challenges Sheng Siong opened 10 new stores in 2018, and has opened three stores so far this year.

The Housing and Development Board, which runs Singapore’s public housing system, has switched more of its retail bidding processes to closed tenders, rather than open ones, Daiwa noted. That can help to keep bidding more rational, which combined with a solid pipeline of upcoming available leases, should provide Sheng Siong with more opportunities to open new stores in Singapore’s space-limited market, Daiwa said.

The investment bank said the stock’s valuations are inexpensive based on the supermarket operator’s earnings growth profile, with an estimated 2018-21 EPS compound annual growth rate of 10.3 percent.

Factored into the upgrade was Sheng Siong’s underlying earnings quality, visibility, a defensive business and a sustainable dividend yield of 3.5 percent, Daiwa said.

Shares of Sheng Siong were up 0.93 percent at S$1.08 at 2:24 P.M. SGT.

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