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Sheng Siong share price inflated?

Sheng Siong is a local supermarket chain with 43 outlets located across Singapore. Listed in the Singapore stock market, this counter is popular among investors. When it got listed in the SGX mainboard on 17 August 2011, the IPO price was $0.33. Fast forward six years later, the share price has surged past the $1.00 milestone recently but investors must be wondering if Sheng Siong share price is inflated.

With a population of 5.3 million, the market for supermarket chain is very small in local context. Furthermore, the market is also saturated with other players, not to mention the mom-and-pop stores. Sheng Siong’s closest rivals are NTUC Fairprice and Dairy Farm which operates the Cold Storage and Giant outlets. Among the trio, Sheng Siong is the smallest operator. To compete effectively against these big boys, Sheng Siong must have the economy of scale and operating margin.

For many years, Sheng Siong’s gross profit margin had been excellent, averaging at least double digits. For 1Q2017, the gross profit margin was 25%, a slight increase of 0.5%. However, operating margin was only 9.5% for 1Q2017. What is the difference between gross profit margin and operating margin? Why is it important for investors to understand this financial metric?

Investing

To put it simply, gross profit margin only reflects the difference between the gross revenue from sales and the cost of goods. It does not include other variables. On the other hand, operating margin includes the costs of taxes and interests, providing a more holistic financial picture than gross profit margin. In this regard, Sheng Siong should continue to improve the operating margin, which was less than ideal.

The main driver for growth for the supermarket industry is still brick and mortar. So, the mode of growth in Singapore is still through the expansion of retail space. Currently, NTUC Fairprice has 130 outlets, Dairy Farm has 78 supermarket outlets and Sheng Siong has 43 outlets. To be fair to Sheng Siong, the management has tried very hard to expand the retail space from 348,000 square feet to 457,000 square feet by increasing the number of outlets from 25 to 43. Looking at the current situation, Sheng Siong’s competitors are still leading the race and Sheng Siong has quite a fair bit of gap to close on its opponents.

Since IPO, revenue has increased steadily from $578 million in 2011 to $796 million in 2016. Revenue per square feet increased from $1638 to $1826. The balance sheet is healthy as Sheng Siong had no borrowings and cash generated from operating activities before working capital changes and payment of tax amounted to $7.6 million in 1Q2017. Free cash flow (FCF) was S$5.0 million, after paying for the acquisition of property plant and equipment amounting to S$2.7 million, which was markedly lower than 1Q2016’s payment of $17.6m as there were no purchases of retail outlets.

Over the years, I have written a number of articles on Sheng Siong. Readers may check out the following:

  1. Is Sheng Siong’s dividend policy sustainable?
  2. Explosive form of Sheng Siong shares
  3. Sheng Siong’s share price is rock solid
  4. Sheng Siong Group

As the free cash flow was only $5.0 million, it is hard to imagine Sheng Siong ramping up capacity rapidly to compete against its giant rivals, which have more resources on hand. Hence, this explains the moderate growth seen for the past few years. Given the management style, Sheng Siong is also not likely to pursue an aggressive growth approach. Hence, the management is taking a conservative approach on the e-commerce and China projects and is still focus on growing its presence in Singapore.

On the future plans of the Group, Mr Lim Hock Chee, the Group’s Chief Executive Officer, added, “We have re-opened our Loyang store with an area of approximately 7,200 sq ft in late February 2017 while our Block 506 Tampines Central store is still undergoing renovation and it is expected to be completed by June 2017. We will remain focused on our retail network expansion plan across Singapore, especially in areas where we do not have a presence. Besides that, one of our key strategies includes nurturing the growth of the new stores. Capitalising on the infrastructure at our Mandai Distribution Centre, we will continue to increase direct and bulk purchasing and change the sales mix to a higher proportion of fresh produce to enhance gross margin.”

Against the above backdrop, one wonders if Sheng Siong’s share price is seriously bloated. Net Current Asset Value per Share (NCAVPS) was only $0.01 while Net Asset Value (NAV) stood at merely $0.179. At the current market price of $0.975, it is hard to justify Sheng Siong share price. As a growth stock, its potential is limited severely by Singapore’s saturated market and potential disruptions from technologies. On the other hand, at current valuation, it is hardly considered a value stock either. The amount of FCF generated is too little to enable Sheng Siong to scale up to a level on par with the big boys like NTUC Fairprice and Dairy Farm.

If investors had purchased Sheng Siong shares for the sake of the dividends, then it should be noted that the total dividend issued so far stood at merely $0.157 since 2012. Since then, the share price has surged from $0.33 to a record high of $1.08 in 2016. Subsequently, the share price dropped to the $0.90 level and recently witnessed a mini recovery to the $1.00 level. Therefore, investors should question themselves whether Sheng Siong is worth the effort to invest or not. In exchange for the annual dividend of 3 or 4 cents per share, there could be a risk of share price correcting by 10% or even 20%.

Trade With The Whale

I have been a fan of Sheng Siong since its IPO but have never bought its shares. On the basis of the latest financial results, there is a lack of compelling motivation for me to enter this counter at current price. Sheng Siong’s share price may have peaked and investing in the company seems risky to me. Make no mistake, this is a well-managed company with sound business fundamentals. But share price of Sheng Siong has gone up too “fast and furious” within the last 6 years.

The story of Sheng Siong story is one of coming of age. It is fundamentally a family-owned and family-run business with a focus on Singapore market. Founded by the Lim family in 1985, Sheng Siong has certainly come a long way. Unless something drastic occurs in the next few years, the management is expected to grow the company in a conservative manner, focusing growth mainly in Singapore. With threats from various competitors (both offline and online), I foresee the share price is poised for a correction. Till then, I will avoid entering this counter.

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SG Wealth Builder

SG Wealth Builder

SG Wealth Builder

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Updated: May 19, 2017 — 3:30 pm

2 Comments

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  1. most developed countries contain a chain or a number of high class shops careering for up market customers and as such stock a large number of part not available in your normal shop . usually they prosper as there profit margins are higher then the average shop . however if the image of the two different types of the operations become blurred to the public the up market shop will always lose .

  2. indeed, i notice sg investment community perfer local counter that they are familiar with, given only a handful number of locally known brands, it is no wonder Sheng Siong share price enjoys a premium.
    a grocery company in US gets only a PS ratio usually less than 1, Sheng siong stands at current 1.8, market doesn’t offer a good entry point.

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