Will Sheng Siong Group Ltd be Impacted by Malaysia Border Closure?

Sheng Siong Group Ltd (SGX: OV8) is one of Singapore’s largest supermarket operators. As of end-2019, it runs 59 outlets with a total retail area of 529, 480 square feet. 

Grocery retailing is a stable business with inelastic demand regardless of economic conditions. Due to this, Sheng Siong (Sheng Siong) is often viewed as a defensive company. Its share price seems to suggest so. Since the start of 2020, Sheng Siong share price fell 18.2%, while the Straits Times Index fell about 28.3%. 

In this article, I will share about Sheng Siong’s financial performance and business expansion thus far. 

Business Overview

The Lim brothers started Sheng Siong as a pork stall in 1985. Unlike other supermarket owners, Sheng Siong specialises in economical grocery stores in heartland areas. Its outlets cater to the needs of nearby residents by providing both wet and dry shopping options. 

It is well known for its fresh produce segment by offering a wide variety of seafood, meat, and vegetables at affordable prices. 

Sheng Siong also develops a selection of house brands that offer customers more than 900 products with substantial cost-saving.  

FY2019 Results Highlights

Revenue for Financial Year (FY) 2019 increased to a historical high of $991.3 million, while groSheng Siong profit grew 11.9% to $266.8 million.

Sheng Siong has maintained its groSheng Siong and operating margin, despite higher sales. 

The retail area expanded by 6.7% as Sheng Siong opened five new stores for the year. 

Source: Sheng Siong FY2019 Results Presentation

Historial Operational Performance

What struck me about Sheng Siong’s historical performance is its consistency. 

Since 2010, the company had consistently increased its store count and total retail area. As a result, revenue increased steadily at 5.20% per year. Sheng Siong kept improving over the years to generate more sales per unit of sales area as its revenue per square feet improve from $1,727 in 2012 to $1,916 last year. 

Source: Sheng Siong FY2019 Results Presentation

Sheng Siong benefits from a stable local grocery retail market. Nevertheless, I find it commendable that the company can grow its revenue faster than the population growth rate. 

Gross Profit and Net Profit Trend

Grocery supermarket is a labour-intensive business with large upfront capital investment. A strong operator would keep its manpower cost, rental expenses, utilities, and maintenance cost in-check so that the profit margin is maintained. 

Sheng Siong excelled in cost management, as seen from its constant gross profit and net profit margin trend in the past 6 financial years. 

Source: Self-compiled from Annual Reports and FY2019 results presentation

Historical Cash Flow

Sheng Siong has been generating increasing cash from its operations. As seen from the table, its cash flow from operating activities had been growing for the past five years from $71 million to $117 million. This is an impressive annual growth rate of 10.3%. 

Source: Self-compiled from Annual Reports and FY2019 financial statements

Sector Comparison

In comparison with the retail industry, Sheng Siong appears to be more expensive in terms of Price Earnings ratio and Price to NAV ratio. 

The closest peer to Sheng Siong would be Dairy Farm which is trading at 16 times Price Earnings ratio. This seems cheaper than Sheng Siong too. However, do note that Dairy Farm is not a fair comparison as it is a diversified retail group with beauty and health and restaurant business. Nonetheless, this is the closest peer we can find among the local-listed firms. 

Source: shareinvestor.com

Strengths and Opportunities

Sheng Siong’s has excellent cost control ability to maintain a consistent margin. The management runs their outlet operations and supply chain so efficiently that new stores can expect to turn earnings-positive with a similar margin as the older stores. The company has done a good job of developing a standard formula for successful store expansion. 

On the rare occasions that new stores do not perform as expected, the management is decisive in shutting outlets, as seen in the closure of the Verge and Woodlands Block 6A outlets in 2017.

Opportunities are aplenty in new retail spaces. Consistent supply of new flats in non-mature estates and development of new towns such as Tengah and Punggol North will see HDB releasing more shops for tender. Sheng Siong can capitalise on these opportunities well based on its familiarity with running supermarkets in heartlands. 

Weaknesses and Threats

Due to our small market size, Sheng Siong’s growth is capped by Singapore’s population growth rate. While Sheng Siong maintains a lean operation to protect its margin, it needs a significant increase in revenue to grow substantially. This entails execution and foreign currency risks.

Sheng Siong opened its first overseas store in Kunming, China back in 2017 which has since expanded to two outlets. With Kunming stores contributing minimal revenue and earnings, Sheng Siong did not report China operations in a separate segment. All we know from management commentary is that ‘Revenue continued to grow steadily for both stores in Kunming, China’.

Sheng Siong faces the risk of food inflation as most of its fresh products are imported from neighbouring countries like Malaysia and Indonesia. Bad weather, natural disaster, or unforeseen event such as Malaysia’s current border closure, could disrupt the supply chain and cause a spike in price. Should Sheng Siong be unable to pass the cost increase to shoppers, its earnings would be impacted. 

Conclusion

Sheng Siong’s consistent, albeit low, revenue and earnings growth are its key strengths. Management runs the company so efficiently that margins have been improving despite a tepid topline growth. 

This makes Sheng Siong a safe company in a stable industry. I would label Sheng Siong as a slow grower under Peter Lynch’s stock categorisation. 

Hence, it is more suitable for investors with a low-risk appetite who prefer solid stock pick with reliable dividends. Note that its dividend was 3.55 cents per share in 2019, giving it a 3.4% yield. 

Investors who are looking for exciting growth and capital gains will need to look elsewhere. 

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