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Explosive form of Sheng Siong shares

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Since my previous review in May 2016, Sheng Siong shares had an explosive form. The supermarket operator’s share price surged from $0.89 to the $1.00 support level. This is an impressive run and effectively, Sheng Siong had shed the “penny stock” tag.

Once again, Sheng Siong delivered a quarterly performance that are within expectations. Revenue continued to grow, recording an increase of 5.5% at $188.8 million compared to 2015. The addition of three new stores had contributed to the net growth in revenue.

Sheng Siong Competitive Edge

Besides store expansion, Sheng Siong’s growth was supported by higher margins. Gross margin increased to 26.1% in 2Q2016 compared with 25.2% in 2Q2015 mainly because of suppliers’ rebates and reduction in input cost derived mainly from bulk handling, which was facilitated by continuous improvements from the central warehouse at Mandai.

Profits for the period was $15.2 million, an increase of 11.3% compared to 2015. Cash flow from operating activities remained healthy at $26.5 million for current quarter but cash and cash equivalents decreased by $75.0 million to $50.8 million. The big drop was due to payment of final dividend for FY2015.

On the basis of the latest financial report, the management of Sheng Siong continues to demonstrate prudent management and operating efficiency. Expenses were tightly controlled. Increases in staff cost were attributable mainly to the additional headcount required to operate the new stores and a higher provision for bonus as a result of the higher operating profit.

Risks for Sheng Siong

The supermarket business is ultimately a grocery retail business and remains largely a brick and mortar industry in Singapore. This means that revenue growth for Sheng Siong will be limited by its store expansion. As the Group positions itself as a mass market player, it will have to continue to grow its physical presence in HDB estates. Obviously rental rates will impact its profitability but in order to continue to compete against the big boys, it has no choice but continue to grow its investment moats through this route.

As compared to Dairy Farm and NTUC Fairprice, Sheng Siong is considered the smallest player. Thus, it may not have the economies of scale for procurement of the goods. However, Sheng Siong manages to mitigate this weakness through its superior operating efficiency. To continue to sustain, Sheng Siong must stay vigilant.

An emerging threat to supermarket operators like Sheng Siong is the rise of e-commerce players. Redmart, a recently established online company selling groceries in Singapore, counts Eduardo Saverin as one of its co-founders. The e-commerce business model may be disruptive to the supermarket landscape and existing players need to be cautious on how local consumer’s spending trend will change in the near future.

On this note, Sheng Siong needs to continue to invest its e-commerce business and examines how to improve the current process of delivery and online payment mode.

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My strategy for Sheng Siong

I am not vested in this counter but nevertheless feel that Sheng Siong’s shares seem overvalued. Entering this counter at current price will seem too risky for me. However, this is definitely a growth stock with strong potential and solid business fundamentals. Since its IPO in 2011, the group has been giving out consistent dividends. For the current financial period, Sheng Siong announced dividend of 1.9 cents per share.

Sheng Siong was listed after the Great Financial Recession, so it is unknown how low the share price will go in the event of market crisis. But nevertheless, it is hard to imagine investors dumping this stock because even in a recession, consumers still need to buy groceries. Sheng Siong has certainly position itself well by branding itself as a mass market supermarket player that appeals to the working class in Singapore.

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Trade With The Whale

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Updated: October 12, 2016 — 11:21 pm

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