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?

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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 [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]

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Updated: May 5, 2019 — 1:19 pm

5 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.

  3. Hi Bruce,

    Your observation is 100% right and I am guilty of too concentrated in SGX stocks too!
    Going forward, I aim to cover NASDAQ stocks. Please stay tune and thank you so much for pointing out.

    Regards,
    Gerald
    https://www.sgwealthbuilder.com

  4. Hi John,

    You can’t compare Walmart to Sheng Siong!

    Regards,
    Gerald
    https://www.sgwealthbuilder.com

  5. In my opinion, the challenge is from online competitors I.e. ALibaba and
    Amazon, rather than just from Bricks and mortar competitors.
    So for me the question is what share of the groceries category can on Line capture in Singapore , say 5 to .15percent, and will the brewing battle between these 2 online giants lead to a price war and if yes, what will be the impact on margins?
    PGL
    16 HOLDING

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