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Sheng Siong – More Than A Modern Homemaker’s Friend
Hot Picks, Tradeable | 11 December 2013
By: Elaine Lee
Articles (11) Profile
By: Simeon Ang
Articles (125) Profile

Supermarkets had an odd lure to us while we were young. Could it be the rows upon rows of candies and chocolates that made us beam from ear to ear? Or was it the neverending hallways that always held surprises for our small, untouched minds.

As time went by, we matured and the supermarket now seems to be another stop in our weekly regime of getting the groceries. More often than not (actually every time), we leave the supermarket with a deficit in cash, that is to say, we spend money.

What if we instead turned the supermarket into a wealth accumulator instead of a channel in which our wealth gets eroded? Yes, what if we could invest in a supermarket and receive a decent return in exchange?

This is what we are looking to do with Sheng Siong.

Home-Grown Supermarket An Attractive Proposition?

Amidst the ever increasing standards of living in Singapore, Sheng Siong Supermarket stands as a beacon against inflation (together with NTUC FairPrice, if you believe the government).

It has over 33 stores all across our island, and purports to offer the lowest prices with quality goods. They have even developed over 400 products under their 10 in-house brands to offer customers quality alternatives to international brands at substantial savings.

Sheng Siong Strategies

Source: Adjunct Professor Mats Lingbald, SMU, foretagsstrategi

Compared to other supermarket stores which might be known for their uniqueness of goods, Sheng Siong is widely recognised for their economical goods.

Sheng Siong operates on several clever strategies to remain well positioned for market advantage against companies in this category of the industry. In order to keep cost down, the company sources directly in China or Vietnam without a middleman.

Other than offering a full range of fresh meat and vegetables in a ‘wet’ and ‘dry’ market environment, they also carry both halal and non-halal meat to suit local races and taste. The company has strategically located their outlets in the heartland of HDB (Housing Development Board) areas which caters perfectly to a their target market (and the modern homemaker).

What’s Cooking Over At Sheng Siong?
Sheng Siong was listed in August 2011 and quickly attained the ‘Most Transparent Company Award’ in 2012 at the Securities Investors Association (SIAS) Investors’ Choice award.

Despite the deterioration of Singapore’s GDP growth in 2012, the company maintained its debt-free status and continues to generate positive cash flows. Sheng Siong has been registering earnings and revenue growth almost every year.

Sheng Siong also boasts gross profit margins that are on a constant rise and an average earnings per share of $0.027.

Source: Sheng Siong Annual Report 2012

Source: FactSet Sheng Siong Income Statement 2008-2012

Throughout these five years, there is no doubt that Sheng Siong’s revenue has been on a generally upward trend. Operating income and net income has also been increasing as of late due to newly open stores.

In 2011, there was a 8.0 percent drop in revenue due to a closure of two outlets at Ten Mile Junction and Tanjong Katong as the buildings were sold for redevelopment.

The closure of these outlets would have caused a S$63.7 million reduction in revenue for FY 2011. However, this reduction was partially offset by the opening of new outlets, which resulted in a net decrease in turnover of $49.9million to $578.4million.

With lower other income and a higher tax charge, FY11 net profit fell a sizeable 36.1 percent to $27.3 million. This was primarily due to lower gross profit as a result of lower sales volume.

Source: FactSet Sheng Siong Quarterly Income Statement 3Q 2012- 3Q 2013

Source: FactSet Sheng Siong 3Q result presentation 2013
Looking at Sheng Siong’s quarterly revenue trend, we can recognise a growing pattern in comparison to the same quarter of the previous year.

In 3Q13, revenue increased 4.8 percent to $177.8 million primarily attributable to new outlets which contributed $12.6 million. Declining sales from matured stores in old housing estates saw a contraction of $4.5 million in comparison to same store sales.

Key Financial Margins

Source: FactSet Sheng Siong Margins 2008-2012

Source: FactSet Sheng Siong 3Q result presentation 2013

Following Sheng Siong’s yearly trend of gross margin, we could see that it is rather robust and steady. On a quarterly basis, gross margins remained stable at 23.2 percent. Hiccups along the way was due to wavering global economic growth. This indirectly affects revenue since consumer spending and population growth are the drivers for Sheng Siong’s revenue growth.

Dividend Payout

There was no dividend distributed in 2011 when they listed. However, holding true to their prospectus, Sheng Siong’s dividend payout ratio for the past year was a handsome 91.8 percent.

Sheng Siong stated in their FY12 announcement that although the company has no formal dividend policy at the moment, they are committed to distributing up to 90 percent of their net profit in 2014. Dividends will still depend on Sheng Siong’s operating results and financial conditions.

As such, analysts are worried that the change in Sheng Siong’s announced business strategy might affect its high dividend payout.

Analysts’ Take on Sheng Siong

As the competition gets tougher, Sheng Siong’s decision to shift its asset-light business strategy is becoming a worry for traders. This was one of the factors Maybank Kim Eng considered when they cut Sheng Siong’s stock to a ‘sell’.

Instead of growth on the horizon, there has been a following quarter of decline. This was directed at the renovation works around the two outlets.

Source: FactSet, Sheng Siong’s consensus calls by analysts.

However, the market holds on to the belief that Sheng Siong is a good long term investment. Its shares have appreciated almost 33 percent since its listing. With its defensive qualities and a robust balance sheet, mosts analysts (83 percent) expect margin growth to continue and have maintained a ‘buy’ call for Sheng Siong.

Surviving In An Evergreen Industry

Population growth and retail spending are the main drivers of this evergreen industry. That said, the industry is not a bed of roses. Sheng Siong has to contend with the following factors that may directly or indirectly affect its financial performance:

  • Economic uncertainty could curtail retail spending (as shown in Sheng Siong’s FY11 annual report)
  • Foreign labour restrictions (a 9 percent increase in levy can potentially affect bottom lines)
  • Disruptive weather and geopolitical problems could potentially affect Sheng Siong’s food supply chains

Advancing With Technology

Nonetheless, with more public housing being built in Singapore, Sheng Siong aims to open new outlets in areas where it does not have a presence.They are also looking to renovate old stores in matured estates to enhance same store sales. Expansions into neighbouring countries like Malaysia and Indonesia are also part of the Group’s expansion plan.

Sheng Siong’s new distribution centre at Mandai, provides a larger capacity for direct and bulk purchasing. This helps to improve its sales mix especially for higher margin products.

With a leverage on technology in the centre, Sheng Siong is gradually trying to divert its heavy dependence on labour to automated machines. This will not only improve productivity but also enable it to be less dependant on labour, thus possibly countering the effects of an increasing foreign workers levy.

In efforts to keep itself current with digital trends, Sheng Siong has jumped on to the social media bandwagon with plans for an e-commerce system. The system is expected to pilot by the end of 2013. It will be catered for consumers who are looking for a hassle-free shopping experience. This will also hopefully aid in sales despite the lack of good retail space.

Although some analysts are not too positive on the immediate impacts of the project, the long term effects are much more difficult to predict. Backed by its strong record of financial performance, it is with no doubt that Sheng Siong will do well even in the midst of a challenging economy.

So, if you fit the bill of a modern homemaker, or (more likely) if you find that you are looking for a safe and dividend yielding stock, perhaps you might want to cast your gaze on this counter.

Besides, in all extreme likelihood, we will not see Sheng Siong disappearing from the face of the earth anytime soon, right?

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This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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