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?
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.
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