Grocery shopping in the stock market | Company Analysis: Sheng Siong (SGX: OV8.SI)

My first memory of visiting a Sheng Siong supermarket was more than 10 years ago. The store was located at the ulu Ten Mile Junction (now known as Junction 10), occupying most of the floor area in the basement. Back then, it was just another fledging supermarket, with few outlets and a hardly prominent name.

Today, Sheng Siong has become a household name, becoming synonymous with “supermarket” or even “place for housewives to buy groceries”, as much as Government-owned NTUC is with these terms. Its supermarkets are ubiquitous, found in nearly every town in Singapore, with more stores yet to come. It even hosts its own family-oriented show on Channel 8,  reaching out to a mass audience with each broadcast. (Ahem, shrewd marketing)

Marketing itself as a supermarket for the masses, with newspaper advertisements proclaiming huge savings from buying their products, or hosting events in the heartlands, Sheng Siong has come a long way from secluded outlets to an island-wide supermarket chain. 

But nevermind the publicity and ubiquity, the discounts and the housewives, I interest myself in finding out not about the price of one kilogram of kang kong, but if Sheng Siong stock is as good as their merchandise – good value, and therefore worth buying.

Grocery Prices

No, it’s not the price of vegetables we’re talking about here – that certainly doesn’t fluctuate as much.

Sheng Siong stock has been on a strong uptrend these two years, up more than 50% since the beginning of 2015. The price surged in the first 5 months of 2015, remaining roughly range-bound between 80 and 90 cents until July 2016, where it punched through resistance and broke out to new highs. 

The stock wasn’t exactly very volatile until recently, and therefore there are fewer lines of support and resistance to ink on the chart. Worth noting however, is that $0.92 formerly served as strong resistance, which the stock failed to puncture three times (circled in yellow) but finally managing to break through on the fourth attempt (circled in red), preceded by a gentle uptrend since the beginning of 2016. Therefore, on any correction from current levels, that level should serve as strong support as well and hence will be very closely watched. 

Speculators and traders caught wind of the breakout in July 2016 and are now actively trading Sheng Siong, as can be seen from the higher than average volumes ever since, as well as higher price volatility on an intraday basis. (Look at that intraday spike to $1.15!) It’s probably a stock on everybody’s radar now. 

With the three moving averages (20-day, 50-day and 200-day) nicely stacked on top of each other in perfect order (highest number below), the technicals indicate bullishness for Sheng Siong in the weeks and months to come. Barring unforeseen circumstances, I expect the stock to keep climbing for the remainder of this year.

Fresh Produce?

With the technical backdrop painted, let’s get down to the business of evaluating the numbers. Favourable prices may not equate to fresh veggies, we’ll examine if Sheng Siong is as good as its stock price suggests. 

	2011	2012	2013	2014	2015
The Raw Numbers
Revenue*	578,443	637,317	687,390	725,987	764,433
Gross Profit*	127,848	140,878	158,213	175,686	188,902
EBITDA*	40,428	58,144	56,580	67,767	79,896
Net Profit*	27,256	41,677	38,907	47,602	56,786
Free Cash Flow*	4,498	21,592	18,814	(9,220)	43,072
Dividends paid*	-	38,324	40,814	40,122	48,865
Profitability and Managerial Effectiveness
Gross Profit Margin	22.1%	22.1%	23.0%	24.2%	24.7%
Net Profit Margin	4.71%	6.01%	5.66%	6.56%	7.43%
ROE	18.4%	27.5%	26.0%	20.1%	23.3%
ROA	11.3%	17.2%	15.7%	13.8%	15.4%
Per Share Data
EPS**	2.21	3.01	2.81	3.34	3.78
DPS**	-	2.77	2.95	2.90	3.25

*Figures in thousands of SGD           **Figures in Singapore Cents

Taking into account this was a company that listed on the SGX a little more than five years ago in 2011, this set of figures show a steadfast financial performance over the years, with steadily increasing revenues year-on-year, accompanied by rising net profit.

However, if we look past the rising revenues and EBITDA figures, a slightly different picture is painted. 

Looking at the chart, we see that Sheng Siong’s net profit and free cash flow does not follow the continuous increment of revenue and gross profit. Free cash flow is inconsistent and fluctuates over the past 5 years. 

Most worryingly, however, is the company’s habit of paying out dividends too generously. Total dividends paid out have always amounted to more than 80% of net profit since 2012. Astonishingly, total dividends paid in 2013 exceeded its net profit, implying a payout ratio of more than 100%! Meaning to say, the company paid out more money in dividends than what it earned in 2013! 

Alarmingly, total dividends paid exceed free cash flow generated every year. Simply put, the company is paying out in dividends more than what it generates from its core business. I suspect this practice will one day become unsustainable, and Sheng Siong will be forced to either cut back on its generous distributions, or find a way to continue financing the payouts (ie. borrow money).

However, at the present, Sheng Siong does seem in a comfortable position to fund these dividend payouts, having no debt on its balance sheet and a fair amount of cash, while still being able to fund its expansion by opening new stores. The high dividend payout ratio could also signify that Sheng Siong is past its “growth” phase and has now matured into a sizable and hopefully, stable company that can deliver good results year after year.  

I remain wary of the generous dividend payouts. It could be a tactic to boost the allure of its shares and therefore boost share prices, as high dividends act somewhat as a “cushion” for falling stock prices. (The yield on the dividend-paying stock goes up as its price falls, making it more appealing to yield-seeking investors)

Much more of a relief is Sheng Siong’s profit margins, which have grown fatter over the years. This could signify operations have become more streamlined to save on costs, or perhaps they have managed to eke out higher prices for their products while keeping operating costs low. In this aspect, Sheng Siong has done a good job. 

 

Managerial effectiveness, measured by return on equity (ROE) and return on assets (ROA) has been wobbly over the years with no discernible long term trend. After three consecutive years of decline through 2012 to 2014, both metrics rebounded in 2015. I hope this continues to be the case for 2016 and beyond. 

However, this also shows a lack of consistency on the part of management, allowing returns to fluctuate so widely. It also goes to show that the business yet to reach a sufficient scale of operations that its returns become stable over time. Thus, it might be an indication that Sheng Siong still has room to grow. 

…All for you?

Just like aunties choosing the best fruits on the shelf at their local Sheng Siong, we have to be selective when it comes to buying stocks. With the current attention on the stock after its technical breakout, investors are no doubt watching the company’s performance closely. Many would be tempted to join in on the rally and buy partial ownership of their favourite neighbourhood supermarket. 

No doubt, Sheng Siong is a sensible buy in the current economic climate. Most of its products (consumer staples), have demand that is both price and income inelastic. People still have to eat even in a recession right? Therefore, Sheng Siong can be said to be a non-cyclical business and hence is a defensive investment in a portfolio. With an acceptable dividend yield of about 3.3% currently, it is ideal for investors seeking shelter from a volatile market and unpredictable economic conditions. 

However, as is the case with utility companies, Sheng Siong’s growth may be limited by the size of the local market. There are only so many aunties that have groceries to buy. The company may be expanding quickly by opening more and more stores, but they will soon hit a limit. The only way to overcome to limits of a small domestic market is to do what others have done – to venture overseas. 

Perhaps Sheng Siong could consider buying a stake in a supermarket chain in a neighbouring country to further grow its business, serving as geographical diversification and also growing revenues. However, with insufficient cash on hand, any acquisition like that would have to be funded with debt, or a rights issue which could devalue the shares. A debt-funded acquisition would be more viable, but could also be expensive to carry out due to interest costs.

Also bear in mind that Sheng Siong doesn’t have a deep economic moat, ie low barriers to entry. Competitor supermarket chains (NTUC Fairprice, Cold Storage, Giant etc) are always lurking, waiting for an opportunity to encroach on Sheng Siong’s turf in the heartlands. 

Focusing on the valuation side of things, I think Sheng Siong is fairly valued at the present, trading at a 12-month trailing P/E ratio of 26. Quite a lot of its future growth has probably already been priced in. Therefore, potential long-term investors should not chase the current rally in an attempt to get a piece of the action. Rather, I’d advise buying on pullbacks, hopefully on a pullback to $0.92 in the event of a market-wide rout. 

Dividend investors should be wary of the high payout ratio, and the fact that dividends paid always exceed free cash flow. A dividend cut in the event of weak performance could easily trigger a drop in share price. 

With that said, I would still look to add Sheng Siong to my portfolio if I had the money, just definitely not at current levels. 

Just my two cents.