Sheng Siong Stock Analysis: Should you buy now?

Today we look at a more local company, and examine Sheng Siong stock analysis. This household name that many Singaporeans are familiar with, is one of the top supermarket retailers in Singapore.

Beginning with a humble history, Sheng Siong started their first supermarket chain store in 1985. The company has grown to one of the largest retailers in Singapore. And it has been listed on Singapore Exchange since 2011.

First, let’s take a look at its business and operations.


Business Overview: Sheng Siong Stock Analysis

From live and fresh produce to preserved food products, as well as general merchandise like toiletries and essential household products, the company operates a total of 63 stores across Singapore.

Source: Sheng Siong / Our Story – Our Housebrand

Other than sourcing for these products, Sheng Siong also develops a selection of house brands. They offer customer quality alternatives to national brands at substantial savings.

Currently they hold over 1,400 products under 23 housebrands.

The group is also expanding overseas, mainly in China, currently operating 2 stores over there.

Hence, the bulk of its business is still located in Singapore.

Source: Statista / Number of supermarkets in Singapore in 2016 and 2017, by chain

It is important to note that Sheng Siong is not the number one retailer in the country when benchmarked against the number of chains and outlets it has.

Other major competitors include NTUC Fairprice, Cold Storage and Giant.

Source: Statista / Sales share of retail food in Singapore in 2018, by major supermarket retailer

Sheng Siong comes in at the third place based on the market share it holds in sales of retail food. But its financial performance has been strong. In fact, the past few years are showing steady growth in its retail business.


Let’s take a look at some key financial metrics for the group.

Financial Review: Sheng Siong Stock Analysis

Growing Revenues

Sheng Siong Stock Analysis, Revenue History

Source: Sheng Siong / Financial Highlights – Revenue

First, observe the revenue trend has seen a steady climb over the past few years.

Due to the coronavirus pandemic effect, FY2020 saw an exceptional 41% surge in revenue compared to FY2019. It crossed the billion dollar mark for the first time to $1.39 billion.

2020 was an unusual year with the pandemic causing lockdowns. People have to stay and work from home. They are unable to dine outside during the lockdown period. This has led to the boom in demand for food and household products as more people cook at home.

Disregarding 2020 figures, Sheng Siong’s revenue climbed at about 7.6% compounded annual growth rate (CAGR) from 2016 to 2019.

Increasing Profits

Sheng Siong Stock Analysis, Net Profit History

Source: Sheng Siong / Financial Highlights – Net Profit

As a result of the growing revenues, Sheng Siong has been able to reap higher profits. As observed from the chart, the company registered $139 million in net profit for FY2020.

Source: Sheng Siong / Financial Highlights – Earnings Per Share

Consequently, earnings per share (EPS) has grown a whopping 83% from 5.04 cents in FY2019 to 9.22 cents in FY2020.

Steady Dividends: Sheng Siong Stock Analysis

Source: Sheng Siong / Financial Highlights – Dividend Per Share

Again, we saw an extraordinary dividend payout of 6.5 cents per share for FY2020. This is due to the unprecedentedly good sales the group achieved, brought about by the pandemic effect. This implies a trailing dividend yield of 4.2% based on the current share price of $1.55.

Other than that, we see steady dividend payout over the past few years as well.

Low Debt Level

Sheng Siong Stock Analysis, Consolidated Statement of Financial Position

Source: Sheng Siong Annual Report FY2020 / Consolidated Statement of Financial Position 

Apart from the strong performance figure, we see that Sheng Siong has a very healthy balance sheet as well.

As of the end of 2020, the group holds about $254 million in cash and cash equivalents. This amount is substantially higher than its short-term and long-term debt worth about $30 million combined.

So all in all Sheng Siong seems like a pretty stable business. The question is if the current valuation is justifiable and if there’s any upside for investors.

Latest Performance Q1 FY2021: Sheng Siong Stock Analysis

Sheng Siong Stock Analysis, Consolidated Statement of Comprehensive Income

Source: Sheng Siong Q1 FY2021 Business Update / Consolidated Statement of Comprehensive Income

As Q1 of 2021 came to an end, we continue to see elevated demand for daily goods. The group continued to achieved sustained higher level sales in the latest quarter.

Q2 FY2020 saw a lockdown in Singapore that resulted in exceptionally high revenue for the group. Other than that, Sheng Siong’s revenue of $338 million in Q1 FY2021 is still slightly higher than Q1, Q3 and Q4 FY2020 that recorded $329 million, $327 million and $319 million in revenues respectively.

Again, this signifies a sustained demand for the group in the near term. However, we are not completely out of the pandemic situation yet. Many people are still staying and working from home. Hence, sales may trend lower once restrictions relax further. Because more people will start going back to the office and dine out.

Valuation

Sheng Siong Stock Analysis, Stock Summary

Source: Yahoo Finance / Sheng Siong Group Stock Summary

In terms of Sheng Siong’s valuation, the market is pricing the company at a Price-to-Earnings (P/E) ratio of around 17 currently. This is based on the trailing twelve months (TTM) of earnings and the current share price of $1.57.

The company has been trading at a P/E ratio of more than 20 historically. This implies that the market seems to have priced in the potential tapering of demand into its stock price.

Meaning, people are expecting Sheng Siong to register lower sales and revenue for the coming year. This is in anticipation of the behavioural change once the pandemic situation gets better.

Capital Upside

Sheng Siong Stock Analysis, Earnings Per Share Chart

Source: Sheng Siong / Financial Highlights – Earnings Per Share

Moving forward, Sheng Siong’s EPS should fall somewhere between the FY2019 level and the elevated figure in FY2020. So let’s take the average EPS of around $0.07 as the projected earnings for the group in the coming year.

Assume that the P/E ratio eventually equilibrates to the usual historical levels of around 20 – 23. We can expect the target price to be around $1.40 – $1.61.

Therefore, at the current share price of $1.57, I think it’s reasonably valued.

Source: Data Commons / Singapore – Gross domestic product growth rate in Singapore

Any capital upside will come from the steady growth of the company. Since Sheng Siong’s core focus is in consumer retail products, I will tie it’s potential growth rate to the historical growth of the Gross Domestic Product (GDP) in Singapore, at the range of 3 – 5% based on the figures from the recent years.

Dividends

Sheng Siong Stock Analysis, Dividends Per Share History

Source: Sheng Siong / Financial Highlights – Dividend Per Share

Similarly, in terms of dividends, 2020 was an extraordinary year. It enabled the group to distribute an exceptional amount of dividends.

Moving forward, it should be more probable to estimate the dividends to lie somewhere between 3.55 cents in FY2019 and 6.5 cents in FY2020.

Hence, we can use an average forecast of $0.05 dividend per share in the coming year. It should be a more probable payout. At a share price of $1.57, this will translate to a dividend yield of about 3.2%.

Conclusion

In summary, Sheng Siong seems to be reasonably valued at the current share price of around $1.57. It will also have a potential capital gain of 3 – 5% per year. And a dividend yield of 3.2% moving forward.

It has a pretty stable business, and a history of strong financial performance with steady expansion plans. Financial health is very strong too.

Being one of the leading supermarket retailers in Singapore, and its continued focus to provide cost-savings and quality day-to-day essential products to its customers, I believe that Sheng Siong’s business will be here to stay.

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