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Sheng Siong: An Inflation Hedge Amid Rising Grocery Prices
Corporate Digest | 18 March 2014
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By: Shane Goh
Articles (99) Profile

While possessing a relatively short history, Sheng Siong has risen to prominence in the past two decades. Sheng Siong operates 33 supermarket stores with both ‘wet’ and ‘dry’ components, with its competitive low prices appealing to the low- and middle-end consumer audience. The firm’s retail stores, spanning 400,000 square feet, are primarily located in the heartlands of Singapore.

In FY13, Sheng Siong recorded $687.4 million in turnover, up 7.9 percent from FY12’s $637.3 million. However, if the 11 new outlets opened in 2011 and 2012 were excluded; same store sales would have declined by 2 percent instead. This was attributed to construction work in the vicinity of Sheng Siong’s stores at Bedok Central and the Verge. If the two were removed from the list, same store sales would have been marginally flat.

Despite the flat same-store growth and operating in a price-competitive retail environment, the effects of Sheng Siong’s warehousing and distribution centre built in 2011 kicked in, as the firm has maintained or improved its gross profit margin since FY11. This led to net profit rising at a compound annual growth rate (CAGR) of 19.5 percent for the past two years, compared with 3.7 percent per year from FY09 to FY13.

Investment Merits

Growing Population And Spending Power
• Singapore’s population forecast to grow from a projected 5.5 million 2014 to 5.9 million in 2018
• Population aged 21 years and above expected to rise 2.5 percent per year from 2013 to 2018 to 4.6 million
• Retailers will target this segment as it possesses the spending power
• Over the next five years, household expenditure is forecast to increase from $146 billion to $217 billion

High Dividend Payout Ratio
• During its initial public offering, Sheng Siong promised to distribute 90 percent of its net profit for FY11 and FY12
• Management reiterated that ratio for FY13 and FY14
• However, expansion plans might reduce the ratio in the future as Sheng Siong requires funds to grow

Investment Risks

High Saturation Point
• Singapore’s mass grocery retail sector dominated by a few players
• NTUC FairPrice and Dairy Farm International Holdings are Sheng Siong’s biggest competitors
• However, the country’s limited size leads to space constraint which renders new market entrants unlikely

Limited Expansion Avenues
• Sheng Siong had options to open new stores in FY13 but price was not attractive
• Introduced e-commerce platform in limited areas (Thomson) in FY13
• Expansion into Malaysia has not been successful thus far

SI’s Takeaway

Although Sheng Siong presents us with an inflation hedge equity-investment option, we have to be weary of certain risks associated with the firm. A rise in operating expenses, manpower costs and a potential maximum capacity for supermarket outlets would hamper future growth and profitability for the firm.

However, I like to think that households would continue to purchase groceries in good and bad times. While consumers may opt for one brand over the other, the supermarket which carries the products profits either way. In this regard, I believe that investing in a company which offers basic necessities provides a hedge against inflation.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

Sheng Siong Group  1.100 -- --   
Business: Co is a supermarket chain operator.

Insight: Apr-19, 1Q19 revenue rose 10.1% to $251.4m mainly ... Read More
Dairy Farm Int'l Hldgs  7.330 -0.22 -2.91%   
Business: Asian retail co that operates supermarkets, convenience stores & others. [FY18 Turnover] Food (70.3%), health & beauty (14.6%), restaurants (11.8%), home furnishings (3.3%).

Insight: Feb-19, FY18 net profit plunged 77% to US$92m due ... Read More

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