Will Sheng Siong benefit from new Covid-19 restrictions?

• Sheng Siong Group Ltd (SGX: OV8) share price declines to S$1.63 per share
• The drop came after an employee at one of its outlets tested positive for Covid-19
• Grocery shopping is likely to increase due to stricter Covid-19 measures, RHB said
• However, Sheng Siong may need to slow down its speed of opening new stores
• Buy and sell Sheng Siong stocks with an IG account

Sheng Siong’s stock retreats after last week’s optimism

Shares of Sheng Siong Group, which runs a chain of supermarkets across Singapore, fell back by 1.8% day-on-day to trade at S$1.63 as of 15:20 SGT on Monday (17 May 2021), with 16.8 million shares changing hands.

The decline came after an employee at one of its outlets in Bukit Batok tested positive for Covid-19. The store has since closed for deep cleaning procedures and will re-open on Tuesday (18 May), the company said.

Last Friday, the government unveiled stricter nationwide curbs - including a ban on dining in and a return to mandatory work-from-home arrangements - to stem the increasing number of Covid-19 community cases.

Within an hour of the news, Sheng Siong’s shares soared to an intraday high of S$1.67, up 12% from the previous day. They went on to finish Friday’s session at S$1.66, marking their strongest close in six months, after 57.4 million shares changed hands.

Out of seven research teams, three rated the stock a ‘buy’ while four recommended ‘hold’ as of Monday. Their average 12-month target price stood at S$1.75, according to Bloomberg data. That implies a potential upside of 5.4% based on Friday’s closing price.

Tighter Covid-19 restrictions to stoke grocery demand again

From 16 May 2021 to 13 June 2021, social gatherings in Singapore are capped at two individuals per group, work-from-home is the default, food and beverage outlets can only offer takeaway and delivery options, among other curbs.

The move ‘should result in a pick-up in grocery shopping activities, and benefit Sheng Siong greatly’, RHB analyst Jarick Seet wrote on Monday.

Demand for food-delivery services and grocery items will spike due to the restrictions, just like what happened with last year’s measures, he added.

RHB thus upgraded Sheng Siong shares to a ‘trading buy’ call, from ‘neutral’ previously. He also raised his target price from S$1.70 to S$1.95.

Seet increased his FY2021 profit forecast by 14.5% on higher sales and margin estimates over the May-June period.

What are the potential downsides for Sheng Siong?

However, the supermarket operator’s new store openings for 2021 are likely to be delayed.

Sheng Siong typically opens three to five new outlets each year, but this will slow down this year due to the slower pace of construction amid the new Covid-19 restrictions, RHB noted. Previous delays in building activities will also cause job backlogs to pile up, the research team said.

Besides, the Singapore government has launched just one tender in November 2020 for two new HDB shops to be used as supermarkets, and Sheng Siong did not win the licence of either of these shops, Seet pointed out.

No new tenders have been launched since then, and tenders will likely only resume when construction activities pick up or normalise, he added.

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