Yahoo Finance Can Sheng Siong’s Share Price Hit a New High? Here are 3 Things You Need to Know
In a year where share prices are falling, Sheng Siong Group Ltd (SGX: OV8) stands out with a gain of around 6% year to date.
The retailer has remained resilient even as US growth stocks tumbled and the REIT sector plunged due to a combination of high inflation and surging interest rates.
The question is: can its shares return to its all-time high of S$1.83 back in August 2020?
Sheng Siong’s fiscal 2022 third quarter (3Q2022) business update gives us some clues.
Investors will be pleased to know that the retailer continued to increase its store count while posting an encouraging set of numbers.
We delve deeper into the retailer’s business update to find out.
A high base effect
For 3Q2022, revenue dipped by 4.2% year on year to S$333.5 million as the group faced a high base effect back in 3Q2021 which was boosted by COVID-19 movement restrictions.
With the pandemic measures lifted in the second quarter and more people dining out, fewer people visited Sheng Siong’s stores in 3Q2022.
Gross profit slid by 2.8% year on year to S$98.1 million while net profit declined 4.5% year on year to S$32.9 million.
For the first nine months of 2022 (9M2022), revenue fell by 1.9% year on year to S$1 billion with net profit staying flat year on year at S$100.4 million.
The group ended the quarter with S$228.6 million of cash and held no debt on its balance sheet.
The good news is the supermarket operator’s free cash flow jumped 17.8% year on year for 3Q2022 to S$49.3 million as the group generated higher operating cash flow and incurred lower capital expenditure.
Continued margin expansion
For 3Q2022, Sheng Siong’s gross margin continued to expand, rising from 29% in 3Q2021 to 29.4%.
The rise was attributed to an increase in the sales mix of products with higher margins.
On this note, the retailer offers over 1,500 products under its 23 house brands that range from food to paper products.
House brands typically command a better gross margin.
However, management cautioned that higher input costs for energy could result in lower margins.
At the same time, more competitors are muscling in to offer better deals in a high-inflation environment.
The resultant price competition and excessive promotions may erode profitability for all players in the near term.
CEO Lim Hock Chee remains sanguine, though.
Even though the inflationary environment is pushing customers to cut costs, he believes that Sheng Siong will do well as it is known for its value-for-money merchandise.
However, he did acknowledge that supply chain disruptions and geopolitical tensions could put a dent in the group’s numbers in the short term.
Healthy growth in store count
Despite the challenges, Sheng Siong has managed to steadily grow its store count and retail area.
Source: Sheng Siong 3Q2022 Presentation Slides
A total of three new stores were opened year to date while one store was closed.
The net opening of two stores has increased Sheng Siong’s store count from 64 at the end of last year to the current 66.
The total retail area has increased by 4.5% since end-2021 to 602,500 square feet.
The group remains on the lookout for retail space in HDB estates where it does not currently have a presence.
In the background, the Singapore government is expected to ramp up the supply of new BTO (built-to-order) HDB flats, with plans to launch up to 23,000 flats per year in 2022 and 2023.
The HDB is even prepared to launch up to 100,000 flats in total from 2021 to 2025 if the need arises.
With this aggressive expansion in new HDB areas, Sheng Siong has ample opportunities to bid for new store spaces to keep growing its store count within the heartlands.
Get Smart: An eye on expansion while watching for risks
Like most companies, Sheng Siong cannot completely avoid the macroeconomic headwinds that are causing a surge in costs.
Hence, investors need to brace for lower margins and possibly lower profits in the near term.
That said, the retailer has a sturdy business model, a clean balance sheet and is generating healthy and consistent free cash flow.
The CEO is also optimistic about the group’s expansion plans as HDB ramps up construction after the delays caused by the pandemic.
Sheng Siong looks poised to do well in the long term but investors will need the patience to see its share price soar to new heights.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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