Sheng Siong Group's FY2024 earnings missed the expectations of UOB Kay Hian but the company is seen to expand further at the expense of competitors. It has maintained a stable payout ratio and strong cash flow generation as well, prompting, analysts John Cheong and Heidi Mo have kept their "buy" call on the stock.
However, with staff costs likely to stay elevated from new hires and the progressive wage model structure, Sheng Siong might see higher costs. As such, they've slightly trimmed their target price from $1.93 to $1.92.
For its FY2024 ended Dec 31 2024, Sheng Siong got to bear with a 10% jump in staff costs equivalent to 15.4% of its revenue versus just 14.6% in FY2023. On the other hand, thanks to a more favourable sales mix, gross margin improved marginally to 30.5%.
In their March 18 note, Cheong and Mo observe that Sheng Siong's revenue growth of 5% in FY2024 has continued to surpass the industry's average, which implies it is gaining market share.
In 2024, the company opened six new stores, bringing the total in Singapore to 75. Thus far this year, it has already opened two new stores and is awaiting the outcome of eight HDB tenders.
"We note that four of these tenders were given up by peers, meaning that SSG has increased opportunities to secure new stores. Hence, we have raised our 2025 store openings forecast from three to five," the analysts state.
According to Cheong and Mo, the higher headcount needed to support the new stores will result in higher staff costs, which lead to a 2% cut in their earnings estimated for FY2025 and FY2026.
A popular theme for investing in consumer staples stocks here such as Sheng Siong is government support in the form of various vouchers to each household. However, the UOB Kay Hian analysts do not see a significant lift to Sheng Siong's earnings from these handouts.
"While some peers are offering promotions to encourage Singapore citizens to use these vouchers at their stores, Sheng Siong is not doing so to the same extent.
See also: PhillipCapital's Chew raises CLI's target price to $3.65 on firmer recurring income stream
However, they anticipate some revenue boosts closer to the voucher expiration dates.
Sheng Siong is seen by Cheong and Mo to maintain its dividend payout ratio of 70% given its strong cash position of $353 million. For the whole of FY2024, the company is paying 6.4 cents per share, a slight increase from 6.25 cents paid for FY2023.
The revised target price of $1.92 is pegged to the same FY2025 earnings multiple of 20x, or its five-year average mean PE.
"We remain positive on Sheng Siong Group as its store count continues to drive its top-line growth and it outpaces industry growth," the analysts state.
Sheng Siong shares changed hands at $1.62 as at 1.41 pm, down 0.61% for the day.
