14 things to know about Sheng Siong Group before you invest

How often do you walk past a solid investment that puts money into your pocket year after year?

If you look around, you’d probably find many businesses that make their shareholders richer by the day. If you are struggling to find any, let me give you a hand. Ask yourself, ‘Where have you spent your money over the last 24 hours?’ I’m pretty sure these businesses are all around you and some of them are listed companies that will continue to deliver solid investment returns to shareholders.

Which leads us to our next question, ‘Then why aren’t people capitalizing on them if these great investments are all around us?’ I believe the answer lies in whether we have a set of ‘trained eyes’ to spot them. Let me illustrate.

Years ago, if you’d asked me about Sheng Siong, my reply would be it’s just a grocery store. I would walk past it without giving much thought unless I was thirsty and needed a canned drink. At that time, you could say that I had ‘untrained eyes’ as I was not able to spot an investment opportunity when it was right in front of me.

So recently, I decided to compile data on SGX-listed stocks. It was only then that a stock caught my attention: Sheng Siong Group Limited (SGX: OV8). As I write, Sheng Siong is one of Singapore’s largest retailers and is worth around S$1.45 billion in market capitalization.

With the data I gleaned, I now look at Sheng Siong with a different set of eyes. In this article, I’ll bring a detailed account of Sheng Siong Group’s achievements thus far, the challenges it faces, and its outlook in the immediate future.

Here are the 14 things you need to know about Sheng Siong Group before you invest.

Track record

1. As of 2016, Sheng Siong operates a chain of 43 grocery stores located across Singapore. It is an increase from 24 stores when it first listed on the SGX in 2011. These stores market a wide range of live, chilled, processed, packaged and preserved food products and other general merchandise including toiletries and household products. This includes over 400 products under 10 of its own house brands, an increase from over 300 products in 2011.

Source: Annual Reports of Sheng Siong

2. Sheng Siong has achieved a CAGR of 6.61% in group revenues over the last five years, from S$578.4 million in 2011 to S$796.7 million in 2016. The growth was contributed by sales derived from its newly opened stores during the period.

Source: Annual Reports of Sheng Siong

3. Sheng Siong has achieved a CAGR of 18.11% in shareholders’ earnings over the last five years, from S$27.3 million in 2011 to S$62.7 million in 2016. In addition to sales from new stores, Sheng Siong has improved its gross profit margins by lowering its cost of sales gradually during this five-year period. This is mainly due to receiving higher rebates from its suppliers from special promotions, volume discounts, displays, and bulk handling services.

Source: Annual Reports of Sheng Siong

4. Sheng Siong has a 5-year ROE average of 23.90%. This means, Sheng Siong has made, on average, S$23.90 in earnings from every S$100 in shareholders’ equity from 2012 to 2016.

Source: Annual Reports of Sheng Siong

5. Sheng Siong is efficient in using working capital as it has low and stable inventory turnover days and trade receivables turnover days. Combined, both inventory and trade receivables turnover days are lower than its trade payable turnover days.

  • Inventory turnover days. This measures how fast Sheng Siong is able to sell its inventory. In 2011, Sheng Siong took 29 days to sell its inventory upon receiving it from suppliers. In 2016, the figure increased to 38 days. This indicates slower sales as it now takes more days for the company to clear its inventory.
  • Trade receivables turnover days. This measures how fast Sheng Siong is able to collect cash from debt owed by its customers. Over the past six years, its trade receivables turnover days has averaged at five days. This indicates that Sheng Siong is efficient in collecting cash from its customers.
  • Trade payables turnover days. This measures how fast Sheng Siong is in making payments to its suppliers. Sheng Siong has increased its trade payables turnover days from 59 days in 2012 to 72 days in 2016. The increase is due to receiving favourable credit terms as a result of higher volume purchases as Sheng Siong expanded its number of stores.

6. Sheng Siong generated S$330.2 million in cash flows from operations over the last six years and raised S$157.1 million in equities. Out of which Sheng Siong has allocated:

  • S$262.6 million in capital expenditures
  • S$22.3 million in net long-term debt payments
  • S$223.9 million in dividend payments to shareholders

This means that Sheng Siong is in itself a cash-producing business and doesn’t need to continually raise equity or debt to expand its business or reward its shareholders with dividends.

7. Sheng Siong has achieved a CAGR of 9.39% in dividend payments to shareholders over the last four years, from S$38.3 million in 2012 to S$54.9 million in 2016. For the financial year ended 31 December 2016, Sheng Siong paid out 3.75 Singapore cents in dividend per share to shareholders. As 20 November 2017, Sheng Siong is trading at 96 cents a share. If Sheng Siong is able to maintain its dividend, its expected dividend yield is 3.90%.

Source: Annual Reports of Sheng Siong

Risks

Presently, Sheng Siong faces several challenges which may adversely impact its financial results. For instance:

8. Sheng Siong is exposed to risks associated to breakdowns in power supply. This may result in spoilage of perishable food products such as chilled meat, frozen food, live seafood, and dairy products.

9. Sheng Siong faces competition from wet markets, supermarkets, hypermarkets, convenience stores, and kiosks for future retail space, products, staff, and customers. At present, Sheng Siong’s key competitors include Dairy Farm International Holdings which operates Cold Storage, Giant, and 7-Eleven in Singapore, and NTUC Fair Price Co-Operative which operates FairPrice stores in Singapore. Increased competition will, in general, result in lower sales and higher operating costs which will impact its bottom-line in the future.

10. Sheng Siong is exposed to risks associated to its lease of retail space. This includes hikes in rental costs, failure to secure renewals of existing leases, failure to secure new leases in strategic locations, and termination of existing leases prior to their expiry. As such, Sheng Siong may be impacted by higher rental expenses and face disruption to existing business operations and its future expansion plans.

Moving forward…

Sheng Siong has revealed the following events which could affect its financial results over the next 12 months. They include:

11. Sheng Siong expects to lose sales from two stores. Firstly, its store at The Verge was closed in June 2017. Secondly, the HDB has indicated that its Woodlands store will close in October 2017. Both of these stores accounted for 7.6% of total revenue in the first half of 2017.

12. Sheng Siong expects two new stores to compensate for the loss of income from The Verge and Woodlands stores. Firstly, it has entered into a lease agreement for a new store of approximately 4,000 square feet at Fajar Road, Bukit Panjang. Secondly, it will be entering into a new lease agreement with the HDB after bidding successfully for a new shop of approximately 12,000 square feet at Woodlands Street 12. Both of these new stores are expected to be operational in September 2017 and October 2017 respectively.

13. Sheng Siong has commenced the construction of the new extension to its distribution centre at 6 Mandai Link, Singapore. This project is expected to be completed by the third quarter of 2018, adding another 50,000 square feet of storage space.

14. Sheng Siong’s renovation of its supermarket in Kunming, China is still in progress. It is expected to be operational by September 2017.

The fifth perspective

Since its IPO, Sheng Siong has delivered consistent growth in revenue, earnings, and dividend payments to shareholders. As at 30 June 2017, Sheng Siong reported S$69.6 million in cash reserves, a current ratio of 1.13 and no long-term debt.

With a healthy balance sheet, Sheng Siong intends to continue its efforts in expanding its retail space particularly in locations where it doesn’t have a presence yet in Singapore. Concurrently, it remains committed to nurture the growth of its new stores and to further enhance its profit margins by increasing its direct purchasing and bulk handling, and changing its sales mix to a higher proportion of fresh produce-based products.

Ian Tai is the founder of Bursa King, a data platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that helps investors unearth consistently profitable stocks from a database of over 900+ stocks listed in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

7 Comments

  1. wah siew

    November 21, 2017 at 11:50 am

    Good article on Sheng Siong. How does it compare to NTUC fairprice which also pays annual dividend to shareholders but not listed on SGX and buys back its shares at original price of $1.00 if shareholders wish to sell?

    • Ian Tai

      November 23, 2017 at 10:10 pm

      Hi Wah Siew

      Thanks for the question. The benefits to be enjoyed by a NTUC union member would be different from a typical shareholder of a listed company. From its website, these benefits include shopping discounts, insurance coverages, and of course, dividends from NTUC. So, I don’t think it’s comparable as it is not ‘apple to apple’ in this case.

  2. Chan k k

    November 21, 2017 at 12:47 pm

    What you think o Giant and Cold storage in Singapore under the Jardin Group?

  3. John

    December 4, 2017 at 3:10 pm

    Hi Ian,
    Is it good to invest Sheng Siong now ? Thanks.

    • Ian Tai

      December 7, 2017 at 12:57 am

      Hi John

      Easy question. Not-so-easy answer. It depends on your investment plan and how you intend to make money from the stock market. Perhaps, some soul searching is required. This would help you decide whether Sheng Siong is suitable for you, its price is right or wrong and more importantly, your actions if Sheng Siong goes up, down or sideways. Your plan is more important than the stock itself. So, get your plan crafted out first before investing.

      • The Fifth Person

        December 7, 2017 at 9:27 am

        👍

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