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Will Sheng Siong’s Dividend Increase in 2022?

Chinese Man Buying Groceries
Chinese Man Buying Groceries

There’s no better feeling than the sound of a dividend cheque hitting your bank account.

Dividends represent cold, hard cash that you can use as you please, whether it be for a holiday with your family or a delicious meal at your favourite restaurant.

They also qualify as a real return on your investments as opposed to unrealised capital gains.

Of the many dividend-paying companies listed on the Singapore exchange, Sheng Siong Group Ltd (SGX: OV8) has got to be one of the more reliable ones.

The retailer, which operates a total of 65 supermarkets around Singapore as of 31 March 2022, has been a consistent dividend payer since its IPO more than a decade ago.

What’s more, Sheng Siong’s share price has also more than quadrupled over this period from S$0.33 to S$1.55.

But that’s in the past.

What about the future? Does Sheng Siong have the potential to raise its dividend this year?

Let’s find out.

Financials remain robust

Sheng Siong has been growing both its revenue and net profit steadily over the years, a testament to the strength of its brand.

Revenue has more than doubled from S$578.4 million in 2011 to S$1.37 billion in 2021 while net profit has risen close to five-fold from S$27.3 million to S$132.8 million over the same period.

This growth was in line with the steady increase in the number of stores Sheng Siong operates, going from 33 in 2012 to 65 as of end-March 2022.

For the first quarter of 2022 (1Q2022), the supermarket operator has continued this momentum.

Revenue rose 6% year on year to S$358 million while net profit increased by 13.9% year on year to S$35.2 million.

Free cash flow for 1Q2022 stood at S$20.1 million.

Sheng Siong’s dividend per share has also been steadily heading up, going from S$0.0177 in 2011 to S$0.062 in 2021.

Assuming the group can continue to increase its net profit and maintain its free cash flow generation, there’s a high chance that its dividend can continue to rise.

Improving its gross margin

Over the years, Sheng Siong has managed to steadily improve its gross margin by tweaking its product mix and relying more on house brand sales.

The group offers more than 1,500 products under 23 house brands that range from food products to paper goods.

House brands are generic goods that are generally cheaper than similar goods and generate a better gross margin for the retailer.

For 1Q2022, Sheng Siong saw its gross margin increase from 27.7% to 28.7%.

Subsequently, its operating margin improved from 11.2% to 12.1%.

It’s impressive to see the group’s gross margin trending up over time, starting with 26.2% in 2017 to 28.7% in 2021.

Better sourcing, bulk discounts from suppliers and a favourable sales mix have helped Sheng Siong improve its gross margins, which in turn flow down to its operating and net margins, thereby further boosting its net profit.

There is a good chance that the retailer’s gross margin can continue to improve as it taps on the above strengths.

Growing its store count

Another growth catalyst for Sheng Siong is its growing store count.

The number of outlets has almost doubled since its IPO.

For the past two years, though, growth stagnated as no HDB tenders were awarded during the pandemic.

Fortunately, the supply crunch has eased and Sheng Siong managed to open one new store in 2021, and is set to open another two in the first half of 2022.

Group CEO Lim Hock Chee has reiterated the group’s plans to open three to five new stores per year over the next three to five years, focusing on areas where the retailer has no presence.

Sheng Siong also currently operates four stores in Kunming, China, and the subsidiary is profitable.

Near-term headwinds

Management has warned of headwinds that may crimp the group’s earnings in the short term.

Elevated demand may taper off as more people head back to the office, but hybrid work could mitigate some of this impact.

At the same time, inflation may dampen consumer spending as more people look to stretch their dollars.

However, a positive side effect may be that more people choose to dine at home rather than eat out, thus boosting sales of necessities and food items.

Whatever the case, the headwinds described above should prove temporary and should not stall the group’s long-term growth plans.

Get Smart: Slow and steady wins the race

Sheng Siong has all the makings of a strong brand that Singaporeans know and trust.

Having been in operation since 1985, the group has strengthened its presence throughout the heartlands since its IPO and continues to expand its store count.

Revenue and net profit should also rise in tandem with this steady expansion.

And with higher profits, investors should also look forward to higher dividends in time to come.

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Our safe-harbour stocks are a set of blue-chip companies that have been able to hold their own and deliver steady dividends. Growth accelerators stocks are enterprising businesses poised to continue their growth.  And finally, the pandemic surprises are the unexpected winners of the pandemic.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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