DBS Group Research is keeping its “buy” call and $2.30 target price on the counter. Analysts Chee Zheng Fend and Andy Sim view the stock as costly but not expensive in an Aug 1 report, shortly after the duo released a report on July 31 immediately post-earnings but before the analyst briefing.
See more: DBS keeps 'buy' on Sheng Siong and increases target price to $2.30
Post-analyst briefing, Chee and Sim are standing pat on their call and target price. While they are still bullish on the group’s margins, discipline investment approach, network expansion and sales boost from the SG60 vouchers, they noted concerns about near-term margin dilution, as new stores typically take 12 to 18 months to break even.
However, the modest 1% y-o-y profit growth in 2QFY2025, against 7% revenue growth, was largely attributed to seasonal softness. Higher staff costs and right-of-use depreciation offset the uplift in gross profits. “We believe this is seasonal and expect profit growth to accelerate in 2HFY2025, supported by a larger store base and the SG60 voucher boost,” say the analysts.
Meanwhile, PhillipCapital Research too has maintained its “accumulate” rating on SSG with a higher target price of $2.30 from $1.89 previously. Head of research Paul Chew says: “New stores will provide the backdrop for revenue to accelerate. We expect operating leverage to creep in as new store sales pick up and wage growth decelerates.”
The way Chew sees it, new stores and rising gross margins are laying the groundwork for stronger earnings growth in the coming quarters. SSG is reducing its reliance on importing agents as its purchasing scale expands. He expects SSG to end FY2025 with at least a 9% increase in footprint.
Operating leverage will arise with a lag as new stores require time to mature, whilst SSG absorbs the higher cost of additional staff. Additionally, the SG60 vouchers could encourage customers to purchase higher-quality products.
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However, the group’s expansion strategy in China remains on the back burner due to a weak economic environment and intense competition from traditional stores.
Similarly, RHB Group Research too is reiterating its “buy” call and increasing its target price of $2.41 from $2.12, on larger average new store size, better gross margin assumptions and continued positive earnings growth outlook led by a larger store network.
Analyst Alfie Yeo says: “We continue to like Sheng Siong for its earnings growth momentum, strong cashflow generation, stable balance sheet, and good dividend payout.”
“While we have kept FY2025’s earnings largely intact due to 1HFY2025’s performance coming in within estimates, we have imputed a more optimistic revenue and margin forecast for FY2026-FY2027,” adds Yeo.
He notes that the average store size for 1HFY2025 has surpassed his new store size expectation of 6,000 sq ft to almost 9,000 sq ft. This leads him to raise assumption to 8,500 sq ft. “We have also raised our GPM assumptions by 0.5ppts to 31.5% to account for continued improvement in sales mix and sales of higher margin products. We believe the current EBIT margin decline is temporal, and will improve as the new stores operate towards breakeven and profitability,” he says.
He views earnings outlook as positive on continued store count expansion to 83 by 3QFY2025, with three more locations awaiting tender results.
While Yeo includes slower-than-expected store openings, lower sales demand and per sq ft traction, and the inability to maintain gross profit margin at current levels, as downside risks, he expects SSG’s performance to remain resilient as it targets the mass market value segment, which will enjoy effects of downtrading in a soft consumption environment.
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On the other hand, CGS International has downgraded its call on SSG to “hold” from “add” previously with an unchanged target price of $2.21, following the group’s recent analyst briefing.
As at 11.30am, shares in Sheng Siong are trading at $2.09.
