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Despite targeting the mass market with lower prices, Sheng Siong’s asset turnover, operating margin and EBIT margin are not only better than that of NTUC but among the best in the world, according to IIFL Securities. Photo: Company


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Lim Hock Chee, MD and co-founder of Sheng Siong Group. Photo by Sim Kih

TWO REPORTS by foreign research houses have come out on Sheng Siong and the management have gone around to two local brokers to present their stories.

We highlight the following about Sheng Siong, whose stock has been heavily traded and soared above its August IPO price of 33 cents.

1. Target 40+ stores, nearly double current number:

Founded in 1985, Sheng Siong has come a long way when it had just 4 stores in the first 15 years of its existence.

Then between 2001 and 2008, the number soared to 22. In the ensuing years, it devoted itself to consolidating its operations.

Today, Sheng Siong has 23 stores and will open two more soon, and is gearing up for more, since a higher number of stores will enhance economies of scale and capitalize on its new logistics infrastructure.

JP Morgan analyst Chan Ying-Jian, in a report, said that management targets to increase the number of stores to over 40. No time frame was given.

As it stands, Sheng Siong is the third largest grocery retail chain in Singapore (after NTUC Fairprice and Dairy Farm) in terms of revenue. It had posted revenue of S$628.4 million in FY2010.

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Interestingly, Sheng Siong makes more money per sq m of store space than its nearest two competitors.

In 2009, the company achieved between 43% and 102% more in revenue per square meter compared to its 2 close peers.

2. Focus on increasing revenue from fresh products, house brands:

What product category gives it the best profit margin made?

JP Morgan’s report said it is fresh produce, which accounts for about 30% of the group revenue. Fresh produce gross profit margin as high as 30-32% compared to the Group’s FY10 margin of 22%.

Its track record and expertise in the direct sourcing and handling of perishable fresh produce has helped enhance margin.

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Wong Soong Kit, finance director of Sheng Siong. Photo: Sim Kih

Analyst Sachin Nikhare from another research house, IIFL Securities, estimated that the share of fresh produce would rise to 40% in the next five years.

In another area of growth, Sheng Siong sees the potential to step up its house brand product offerings from the current 300 products.

House brands generally give 5-10 percentage points higher GP margin than the third-party brands. Currently, about 5% of the group revenue is derived from house brands.

IIFL said Sheng Siong aims to double the contribution from house brands to 10% and expand the products covered by house brands to 4,000 products in the next 3-5 years.

3. Dividend, earnings growth, target price:

Sheng Siong targets to pay up to 90% of its net earnings for FY11 and FY12, which translates into a 4.8% dividend yield based on FY10 recurring earnings and the recent stock price of 46.5 cents.

While JP Morgan does not have a target price for the stock, IIFL has: 61 cents.

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These 2 photos capture the progress of Sheng Siong. At top, the company's old warehouse and, at bottom, the new $65-million warehouse and distribution centre and corporate HQ completed in May 2011 in Mandai Link. Photos: Company

IIFL estimated Sheng Siong’s net profit (core) to register 23% CAGR during 2011-13 on the back of new store openings and higher margins from its new S$65m warehouse/distribution centre.

It valued the stock at 11x 2012ii EV/EBITDA.

IIFL expects a 23% net profit (core) CAGR over 2010-13, which would be driven by a rise in new store openings and EBITDA margin improvement.

IIFL estimated that Sheng Siong's net profit would decline 6% in 2011 in the abence of investment gains.

In 2010, the net profit included S$9.6m in investment gains and S$0.8m from the Singapore government for the job credit scheme. The investments (in equities) have been sold and Sheng Siong will not make such investments in future.


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  • Lionel Lim