The stubbornly high inflation and concerns over a potential economic recession have loomed over the stock market in 2022.

While rampant inflation and the deteriorating macroeconomic outlook remain a concern, investors should take advantage of market weakness to buy companies that will benefit from the current conditions.

I think one of the companies that will benefit from inflation fears is Singapore’s supermarket operator, Sheng Siong Group Ltd (SGX: OV8).

There are a lot of reasons to love Sheng Siong, which started out in 1985 as a family-owned provision store.

The supermarket’s strong track record in maintaining its margin under inflationary environments makes it an attractive buy during this time.

Here are five reasons why I believe long-term investors should buy this Singapore supermarket stock.

1. Strong margin track record despite inflationary environment

As mentioned in the article “5 Top Singapore Stocks to buy in June”, Sheng Siong has a strong track record of maintaining its margin despite the cost pressures.

This is mainly due to the supermarket’s position as a “value-for-money” supermarket chain.

A possible implication from rising inflation is a shift towards home dining for consumers, which will lead to more value-conscious grocery shopping.

This will give room for Sheng Siong to raise prices to pass on the costs to consumers, while preserving its margins.

2. Sheng Siong’s Q1 FY2022 earnings beat expectations

Sheng Siong continues to show resilience in its earnings. During the first quarter of its financial year 2022 (Q1 FY2022), the supermarket operator reported a net profit of S$35.2 million, which was above consensus estimates.

The earnings also represented double-digit growth of 13.9% year-on-year (yoy). Earnings momentum is also sustained as seen by its 7.9% quarter-on-quarter (qoq) growth.

During the quarter, revenue rose by 6.0% yoy to S$358.0 million, while comparable same-store sales increased 4.7% yoy and 1.0% yoy in Singapore and China respectively.

3. Opening 3-5 new stores per year over the next 3-5 years

Over the last two years, the supply of new HDB commercial space was affected for various reasons amid the COVID-19 pandemic.

As we move towards normalisation, this is expected to gradually improve. In FY2021, Sheng Siong has managed to secure leases for three new stores.

According to the company’s management, the supermarket operator targets to open three to five new stores per year over the next three to five years, focusing on areas that Seng Siong does not have a presence in.

4. Strong balance sheet with net cash of S$254 million

Sheng Siong also has a strong balance sheet to withstand the uncertainties in the coming months amid the rising inflation and interest rate environment.

As at 31 March 2022, Sheng Siong has a net cash position of S$254 million and its positive operating cash flow of over S$20 million put the supermarket operator in a good position despite the rising rate environment.

5. Good valuation with a dividend yield of 4.0%

I think another reason why investors should consider adding Sheng Siong into their portfolio is the current valuation that offers a dividend yield of 4.0%.

Sheng Siong is also trading at a lower valuation than its historical value.

At its current price of S$1.52 per share, Sheng Siong is trading at a price-to-earnings ratio (PE) of 17 times, which is below its five-year PE of 20 times.

Downside risk remains though

While there are reasons for optimism, investors should be aware of the downside risks when investing into Sheng Siong.

1. Slowdown in demand for groceries with the reopening of economies

In the response to questions from shareholders during the Annual General Meeting (AGM) in April 2022, the management expects the elevated demand for groceries to taper down as consumers increase their spending on other social activities and international travel.

2. Supply chain disruptions and higher operating costs

The management also pointed to the risks of supply chain disruption arising from COVID-19, climate and geopolitical events, all of which could result in higher input costs.

While Sheng Siong has a strong track record in maintaining its margin, higher operating costs and an elevated inflationary environment could still eat into the margin of the supermarket operator.

Steady, resilient business model and growth potential in China

Sheng Siong has built a strong foundation over the years.

With a strong brand name in Singapore as a value-for-money supermarket, Sheng Siong has maintained resilient earnings growth over the years.

In line with that, the company’s dividend has also risen in tandem with this steady expansion.

While the near-term headwinds are unavoidable and a normalisation in demand could affect Sheng Siong’s earnings, the Group has strong growth potential in China while the secular trend of taking market share from wet markets remains intact.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.