• Stay OVERWEIGHT; Top Picks: Sheng Siong (SSG) for stable earnings growth and DFI Retail (DFI) for turnaround play. We remain OVERWEIGHT on Singapore grocery retailers with BUY calls on DFI and SSG. Sector valuation at 13-16x FY24F P/E is compelling with 4% dividend yield. FY23- 26F earnings CAGR growth outlook is 5% for SSG and 22% for DFI. We see growth for DFI driven by the turnaround of Hong Kong and China operations, while SSG’s growth is expected to be led by new stores.

• Sector core FY23 results remained firm. FY23 earnings saw SSG tracking in line with expectations, with DFI’s core operating profit above expectations. Although our sector’s FY24F-25F earnings revision was negative, that was largely due to the net profit drag from DFI’s JV/associate income. Nonetheless, excluding the latter and one-off expenses, the sector’s core operating profit exceed expectations. SSG showed revenue growth driven by new stores, but operating margins were weaker on lower other income and supplier rebates. DFI’s revenue was flat, but margins outperformed, contributed by sales, traffic recovery, and operating leverage at the convenience stores and health & beauty segments.

• Sector well placed for growth. The sector remains resilient, in our view, as core earnings performance continues to hold up. DFI is on track for earnings recovery while SSG is in the sweet spot to bid for more new Housing & Development Board (HDB) outlets. DFI is seeing positive signs of recovery, with its convenience stores and health & beauty segments showing revenue growth and margin leverage. Going forward, we expect growth in Hong Kong tourist arrivals to drive recovery for DFI.

• Expect stronger consumption and more supermarket supply going forward. Our economics desk estimates Singapore’s 2024 GDP growth forecast at 2.5%, as the external environment improves. This should eventually translate into more positive consumption and income from the workforce, as domestic industries recover and benefit from a more robust global demand. There will be five new HDB supermarkets up for bidding in the next six months, with 2H24 and 2025’s pipeline of planned new HDB supermarkets at two. We believe the robust supply in 2024 that is expected to come on stream in the shorter term will benefit supermarket players as a whole, offering more opportunities for grocery retail players overall to win more new outlets.

• BUY DFI for earnings recovery. DFI remains our recovery play. We anticipate continued earnings recovery in FY24 as new CEO Scott Price restrategises the group for further growth on the back of improving consumer demand. Dividend yield is decent due to parent company Jardine Matheson Holdings’ (JM SP, NR) practice of uplifting dividends back to group level. The stock currently trades at an attractive 13x FY24F P/E vs our implied target P/E of 17x.

• BUY SSG for stable earnings growth. We are also upbeat on SSG, with growth fuelled by new outlet wins and better consumption on higher purchasing power from the Budget 2024 announcement. We expect new store openings to be robust on the HDB’s healthy pipeline of new outlets. SSG is also a beneficiary of the Assurance Package and Community Development Council (CDC) vouchers given to consumers in Budget 2024, which we believe will boost consumption. Valuation at -1SD (c.16x) from its historical mean forward P/E (c.19x) is attractive. The stock is also supported by c.4% FY24F yield.

Source: RHB Securities Research - 26 Mar 2024