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Although Fairly Valued, Sheng Siong Is STILL Growing
Corporate Digest | 03 December 2015
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By: Xiu Kai Sua
Articles (10) Profile

Sheng Siong Group (SSG) is the third largest supermarket chain in Singapore. It provides low-cost essential products to mass market consumers through a no-frills approach. In the supermarket scene dominated by three major players: SSG, NTUC Co-operative ltd and Dairy Farm International (DFI), SSG is ranked third in both revenue and store count.

Since its IPO on 17 August 2011, SSG is estimated to have gained an additional three percent market share to approximately 15 percent currently through intensively opening new outlets in the heartland areas of Singapore and has opened 16 new outlets to 38 outlets as of 30 September 2015, with floor area increasing 25.7 percent from 339,009 sqf to 426,000 sqf, and closed just 3 outlets in years 2011 and 2012.

SSG is expected to increase store space by an additional 13.4 percent in store space of 55,285 sqf by end-2017 and has been prudent in its pursuit of new outlets.

General Domestic Tailwind

As SSG is engaged in the supermarket business selling many necessities, it can be said that negative impacts, should there be an economic recession, will be cushioned as consumers will still have the need to purchase daily necessities, albeit switching to cheaper alternatives or brands. As such, SSG has the advantage over its peers such as DFI and NTUC as it has established itself as a supermarket for selling items at a lower price level and providing greater value for money, and since groceries are price unbiased, consumers will go for cheaper options if given a choice.

The National Environment Agency also reported a 17 percent fall in stalls operating at its wet markets from 2000 to 2009, and SSG is expected to continue taking market share from the traditional stores as they have established themselves as the only supermarket that offers fresh and live produce that are usually available exclusively in wet markets, with many outlets having designated areas for displaying live seafood for consumers to choose and purchase.

As wet markets tend to be fragmented, this leads to lower economies of scale compared to modern grocers like SSG. Therefore with SSG offering similar fresh and live produce in a cleaner air-conditioned environment at cheaper prices and longer operating hours, SSG is able to cater to working professionals who find it more convenient to do their marketing after working hours as well as older aged customers who prefer live produce.

SSG continues to increase its market share over the years in Singapore’s mass market modern grocery with its low-cost/no frills approach. This was possible as SSG sources many of its fresh produce directly from Malaysia, especially vegetables. With the SGD strengthening against the MYR (exchange rate peaking at S$1:RM3.12 in September 2015 amidst political uncertainties in Malaysia) SSG is expected to benefit from lowering costs through imports from Malaysia.

Numbers’ Analysis

Among the Singapore players, SSG has the highest EBIT margin. Between FY09 and FY13, SSG’s EBIT margin ranged from 5.9 percent to 7.8 percent, whereas its main competitors NTUC and DFI’s EBIT margin came in between 3.1 percent to 6.7 percent and 4.9 percent to 5.9 percent respectively.

On a regional basis, SSG’s FY13 EBIT and EBITDA margins of 6.8 percent and 8.2 percent are above regional ASEAN peers’ average of 5.5 percent and 7.5 percent.

The gross margin for SSG in FY14 came in at 24 percent, lower than the 30 percent that DFI reported for the same period. However SSG’s net margin figure in 2014 clocked in at 6.6 percent, whereas DFI’s net margin recorded 4.5 percent.

In their 9M15 financial statement, SSG reported a 17.8 percent growth in net profits to $42.2 million with a 5.4 percent growth in revenue to $577.3 million.

Revenue is forecasted to hit $761 million for full FY15, implying a growth of 4.8 percent. From FY13 to FY15F, SSG has also seen healthy growth in its NPAT, ranging from 8.3 percent to 20.3 percent.

SSG also has a strong record in its balance sheet without any debt while maintaining a high amount of cash on hand. In FY14, the cash held by the group amounted to $130 million, equivalent to 10 percent of its whole market capitalisation as well as 37 percent of their total assets, allowing the group to secure a strong position to sustain is daily operations and the ability of continuing operations should any crisis hit.

In FY14, SSG has reported a ROE of 20.15 percent, a massive figure as compared to the sector average (Commerce) of a mere 2.07 percent, implying SSG has been very efficient in utilising its shareholders funds in generating profits.

At the same time, SSG has recorded a ROA of 21.07 percent, much higher as compared to the Sector average (Commerce) of 10.74 percent, indicating that its management team is able to effectively allocate its resources, earning a higher return with lesser investment, compared to other companies in the sector.

In the cash flow statement, the group also has an impressive record of achieving higher operation cash flow than net profits throughout the years, except for FY12 which was lower due to a higher level of cash outflow for tax payment, stocking up of inventories and reduction of payables as the bonus for the first half of FY12 was paid.

Furthermore, the group has maintained positive free cash flow over the years (except FY14), achieving a free cash flow of $20.3 million in 9M15, cementing its ability for self-reliance and launch of new ventures without the need of borrowing money, or create new value to shareholders through share buyback or dividends.

For the past four years, SSG has distributed up to 90 percent of its net profits and management has reiterated its intent to maintain the pay-out ratio for the next two years.

Valuation

From FY12 to FY14, SSG has traded at a PE of between 21.0x and 27.0x, with a mean of 23.3x and median of 21.8x. According to the latest year’s earnings per share, SSG traded within a PE range of 18.6x and 27.8x, and currently trades at a PE of 22.10x (price as of 23 Nov 2015). In contrast, one of its biggest rival and peer in the grocery/supermarket industry, DFI, is trading at a PE of 17.61x. With the industry average PE of 21.7x, it implies that SSG is valued in line with investors having slight optimism on its future operations.

Armed with a Bachelor in Economics and Finance, Xiu Kai keeps a watchful eye on the markets and conducts due diligence on selected stocks through a tested and proven value investing model.

Please click here for more information about this author.

Sheng Siong Group  1.120 +0.010 +0.90%   
Business: Co is a supermarket chain operator.

Insight: Jul-18, 1H18 revenue grew 5.4% to $441.3m mainly c... Read More
Dairy Farm Int'l Hldgs  9.300 +0.07 +0.76%   
Business: Asian retail co that operates supermarkets, convenience stores & others. [FY17 Turnover] Food (74%), health & beauty (12.8%), restaurants (10.3%), home furnishings (2.9%).

Insight: Mar-18, FY17 net profit fell 14% despite a margina... Read More


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