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

Sheng Siong's share price plummeted by 15% over three trading sessions after the company disclosed a competitive grocery retail landscape in its third-quarter results. Nonetheless, analysts remain optimistic about the supermarket operator's prospects. Mr Paul Chew, head of research at Phillip Securities Research, highlighted that Sheng Siong is gaining market share, particularly in fresh food sales.

The company opened three new stores in the third quarter, bringing its total to 92 stores in Singapore. Analyst Meghana Kande from CGS International Securities also views Sheng Siong favorably, citing strong earnings growth driven by new store expansion and efficient operations. Despite the share price decline, CGS International Securities maintains an "add" call on the stock, while Phillip Securities believes in a "hold" position.

CFY Singapore's senior research analyst Alfie Yeo has a "buy" recommendation for Sheng Siong, expecting the stock to continue rising if earnings growth continues. The stock's downfall began after the company reported its third-quarter results, which pointed to a competitive grocery retail landscape, rising costs from wage increases and higher diesel prices, and the potential impact of the Johor Bahru-Singapore Rapid Transit System Link (RTS), which could intensify price competition.

However, Sheng Siong remains well-positioned to handle geopolitical uncertainties and disruptions, with consumers expected to remain value-conscious due to elevated living costs. The company's net profit rose by 1.8% from the previous year, and its share price closed 4.6% lower on Friday and 9.4% on Monday, dipping to its lowest level in a year.

OCBC equity analyst Chu Peng attributed the sell-off to a softer outlook for next year, citing risks such as slower store expansion, higher electricity and labor costs, and potential pressure on margins. The stock is currently priced at a price-to-earnings ratio more than two standard deviations above its historical average, leaving little room for disappointment and increasing its vulnerability to a sharper correction amid slower growth and rising cost risk.

Efforts to downplay the impact of SG60 vouchers, which provided revenue and sales boosts in the third quarter, were met with skepticism, as analysts, like CGS International Securities' Meghana Kande, describe vouchers as an ad-hoc bonus. Even as vouchers taper off, Sheng Siong's fundamental positioning as a value-for-money supermarket is expected to benefit the company in an inflationary environment.