SI Research: Sheng Siong Group – Supermarket Spending Continues To Grow

Amid a challenging economic outlook for 2017, Singaporeans could see tougher times ahead. In February 2017, Singapore’s Department of Statistics reported that families across all income groups saw their earnings rise at a slower growth rate for 2016, as compared to the previous year.

A month later, a survey by recruiting company, Hays, revealed that about 46 percent of Singaporean employers expect to give salary increases of between three and six percent, down from 52 percent during the last salary review period.

Despite the bleak outlook, the cost of living in Singapore is set to rise on the back of higher oil prices, while the increase in water prices and carpark charges are expected to contribute to a smaller and temporary rise in inflation.

As such, it is likely that more Singaporeans will tighten their wallets in the year ahead. One effective way of reducing spending is dining at home instead of dining out. This would lead to benefits for supermarket chains such as Sheng Siong Group (Sheng Siong), NTUC FairPrice and Finest, Giant and Cold Storage, as consumers purchase more groceries for home cooking.

This issue we take a look at how Sheng Siong remains unfazed as the competition intensifies.

The Business

Sheng Siong is Singapore’s third largest supermarket operator, behind NTUC FairPrice and Dairy Farm International Holdings (Dairy Farm), with a total of 43 supermarkets and grocery stores primarily located in the heartlands of Singapore.

Since my previous coverage in October 2015, Sheng Siong’s shares have gained 20 percent to $0.99 as at 5 June 2017, while providing a stable dividend yield of over 3.5 percent. While the gains were not significantly large, the local supermarket chain has outperformed the benchmark Straits Times Index, which gained 16 percent over the same period.

Financial Results

Source: Shares Investment

Source: Shares Investment

Sheng Siong has displayed stable growth over the past few years as the group continues to its efforts to increase margins. Gross profit margin improved one percentage point for FY16 while net profit margin increased at a slower rate of 0.5 percentage point.

Going forward, there is much room for improvement as sales of house brands currently make up less than 10 percent of the group’s turnover. As more consumers look towards lower-priced alternatives coupled with the group’s on-going efforts to promote its house brands, this is one segment that could contribute to improved margins in the future.

Apart from the stable performance, Sheng Siong is not only debt-free but maintains a cash pile of $68.3 million ($0.05 per share) as at 1Q17. While not exactly impressive when compared to the group’s market capitalisation of $1.5 billion, it basically means that the group has a lower interest rate risk.

Unique Outreach Efforts

Ideally, a supermarket operator would prefer to achieve a positive same-store sales growth. However, Sheng Siong’s revenue growth for 1Q17 was mainly driven by new store openings. As an indication of the competitiveness of the industry, new store openings contributed 6.2 percent to the group’s revenue growth, while same-store sales growth was flat.

Nonetheless, Sheng Siong continues to reach out to end-consumers through channels such as the live television variety show, The Sheng Siong Show, which has allowed it to build a strong following in Singapore.

Continuing to engage with the community, Sheng Siong has partnered with POSB in the bank’s nationwide online and social campaign, in which a monthly lucky draw will see 1,400 winners participating in a grocery shopping spree at Sheng Siong.

These events create much publicity for Sheng Siong and bring the brand closer to the community.

Peer Comparisons

(As at 6 June 2017)

(As at 6 June 2017)

In terms of trailing 12-month price-to-earnings (P/E), Sheng Siong’s shares are currently valued at a P/E of 23.5 times, similar to that of Dairy Farm. However, Sheng Siong’s shares command a higher dividend yield of 3.8 percent, while the group remains in a net cash position as opposed to that of Dairy Farm, which is sitting in a less comfortable net debt position of US$640.8 million ($884.1 million).

Hence, amongst the only two listed supermarket operators in Singapore, Sheng Siong would probably be a better choice for upside potential.