Stock Investing: Sheng Siong Group

In July 2015, one of the stocks I am tracking, Sheng Siong Group, delivered another stellar set of results. The company is one of the largest supermarket chains in Singapore and recently declared an interim dividend of 1.75 cent per share on the back of a 23.1% year-on-year increase in net profit to $13.6 million for the 3 months ended 30 June 2015.

Notably, the revenue increased because of the increased sales from the four new stores. According to Mr Lim Hock Chee, the Group’s Chief Executive Officer, “We are pleased to open four new stores since the start of the year, bringing our total retail area to 426,000 square feet. This represents a 5.4% growth in our retail area, compared with a retail square footage of 404,000 square feet as at December 31, 2014. We remain committed to our store expansion plans, particularly in locations where we do not have a presence, so as to reach out to our customers. At the same time, we will continue to nurture the growth of both our new and old stores, improve the sales mix and work towards reducing input costs by capitalising on our Mandai distribution centre.”

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One of the factors I like about Sheng Siong Group is that the balance sheet is pretty strong and that the company had no borrowings as at 30 June 2015 and 31 December 2014 respectively. The Group’s balance sheet remained strong with cash and cash equivalents of S$131.7 million as at 30 June 2015.

Although investors might think that the management is conservative when it comes to putting the amount of cash to good use, the company is quite aggressive when it comes to margin enhancement initiative. For example, they are increasing direct sourcing and bulk handling, improving sales mix of higher margin products and increasing selection and types of house brand products. The company is also test bedding e-commerce initiatives and expansion in China.

Another important investment fact that investors should note is the cash flow. In fact, cash flow is always the first thing that investors should look at when reviewing the financial report. This is because operating cash flow is the most difficult to be “financially engineered” to look good. A company can always use different accounting tricks to bolster the profit and loss segment and also the balance sheet. But operating cash flow is different. A good company should minimally maintain a positive operating cash flow and able to generate healthy cash flow from its operating activities.

For Sheng Siong Group, the company scored pretty well for its cash flow segment as it continued to generate healthy cash flow from operating activities in 2Q2015, with cash flow generated from operating activities of S$16.6 million being higher than 2Q2014’s operating cash flow of S$12.1 million. However, free cash flow was reduced to S$1.2 million for 1H2015 after the payment of the final dividend amounting to S$22.6 million in May 2015 and the payment for property, plant and equipment of S$6.2 million.

From the perspective of a dividend investor’s perspective, the dividend might be good news as it means a form of passive income for the investors. However, for growth investors, such dividend payouts might not be good for the company seeking to grow its moat to compete with other big players in the market. For supermarket chains like Sheng Siong Group, having the moat is important because it means that the economy of scale is there to fend off competition from other market players. This is critically as Singapore is already so small and saturated. Without a market presence and retail space, the competitive edge of Sheng Siong Group would be eroded in no time.

Not vested in this counter but definitely a company worth tracking.

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Magically yours,

SG Wealth Builder

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