Despite Sheng Siong stock slide, reason for optimism remains in business outlook: Analysts

SINGAPORE: Despite Sheng Siong’s share price tumbling 15 per cent over three trading sessions, some analysts remain optimistic about the supermarket operator’s outlook.

“Structurally, Sheng Siong is gaining market share in the grocery sector especially in fresh food sales,” Mr Paul Chew, head of research at Phillip Securities Research, told CNA on Tuesday (Nov 3).

Sheng Siong opened three stores in the third quarter ending Sep 30, raising the group's number of new stores for the year to seven. The group now operates a total of 92 stores in Singapore. 

In Mr Chew's view, new store openings are the core driver of the company’s growth and share gains, and competition has retreated over the past two to three years.

CGS International Securities, too, likes Sheng Siong for its earnings growth, which is backed by new store expansion and strong operational execution, said analyst Meghana Kande.

CGS International Securities has maintained its “add” call on Sheng Siong, while Phillip Securities has a “hold” position.

RHB Singapore’s senior research analyst Alfie Yeo has a “buy” call on the stock.

“We believe that (Sheng Siong Group’s) share price can continue to increase if its earnings growth persists,” said Mr Yeo.

WELL-POSITIONED DESPITE GLOOMY OUTLOOK

The decline in Sheng Siong’s share price began on Friday after the company reported its third-quarter results, flagging a competitive grocery retail landscape and sustained promotions that pressure revenue and margins.

The management also highlighted rising costs due to wage increases and higher diesel prices, and the upcoming impact of the Johor Bahru-Singapore Rapid Transit System Link (RTS), that could intensify price competition. 

However, it added that the company is well-placed to weather geopolitical uncertainties and disruptions as well as potential competition from the RTS Link, as "consumers are expected to remain value-conscious amid elevated living costs".

Net profit increased 1.8 per cent from a year ago. 

The stock closed 4.6 per cent lower on Friday, followed by 9.4 per cent on Monday.

On Tuesday, the stock dipped another 2.5 per cent lower, closing the day at its lowest in a year.

OCBC equity analyst Chu Peng said the sell-off appears to be driven by a softer outlook for next year, rather than the results for the third quarter.

“Investors are pricing in the risk of slower store expansion, higher electricity and labour costs, and the resulting pressure on margins,” she said.

Ms Chu added that the stock was trading at a price-to-earnings ratio that was more than two standard deviations above its historical average, “leaving little room for disappointment and making the stock more vulnerable to a sharper correction amid slower growth and rising cost risk”.

CGS International Securities’ Ms Kande said the stock has had a decent rally this year, and investors may be taking some money off the table.

Asked about SG60 vouchers, which Sheng Siong said gave revenue and sales a boost in the third quarter of last year, Ms Kande downplayed their impact, describing vouchers as an "ad-hoc bonus". 

Even as vouchers taper off, Sheng Siong’s fundamental positioning as a value-for-money supermarket should be beneficial in an inflationary environment, she said.

Mr Chew of Phillip Securities Research also said new stores ultimately drive revenue growth more than vouchers. 

“Vouchers are likely substituting cash purchases of groceries, not increasing it,” he said.