Sheng Siong (SGX: OV8) is a familiar name to most Singaporeans.
The retailer, which has a chain of 68 supermarkets across Singapore, sells a wide variety of items including fresh and frozen produce, foodstuffs, toiletries, and household essentials.
It also offers more than 1,600 products under its 23 house brands.
The supermarket operator has, however, seen its share price sliding by close to 8% to its 52-week low of S$1.51.
It is also down nearly 17.5% from its all-time high of S$1.83 back in early May this year.
Given the pessimism surrounding the stock, should investors worry?
Higher expenses crimped net profit
Investors may have been disappointed by Sheng Siong’s recent financial results.
The retailer released a mixed set of earnings for its 2023 first half (1H 2023).
Revenue inched up 2% year on year to S$690.5 million with gross profit improving by 3.1% year on year to S$205.1 million.
Net profit, however, dipped slightly by 2.9% year on year to S$65.5 million.
Although the top line increased, higher operating expenses were the culprit that crimped Sheng Siong’s net profit.
Higher labour costs were incurred because of a tight labour market with utility expenses jumping as the group’s electricity supply agreement was renewed at a higher rate at the end of 2022.
Management warns that high inflation and disrupted global supply chains may continue pushing up prices for food and essential items, affecting demand for its products.
However, Sheng Siong’s house brand sales should benefit as these are priced more attractively and offer the group better gross margins.
Another bright spot is the supermarket retailer’s free cash flow generation.
Despite the lower profit, Sheng Siong generated a positive free cash flow of S$72.3 million, a 31.7% year-on-year jump compared to a year ago.
2021 and 2022 also saw consistent free cash flow generation from the group, coming in at S$141 million and S$158 million, respectively.
Because of this copious free cash flow generation, Sheng Siong was able to pay out an interim dividend of S$0.0305 for 1H 2023, although this was a tad lower than the prior year’s S$0.0315.
Store count continues to grow
Source: Sheng Siong 1H 2023 Presentation Slides
Investors may be concerned about rising costs, but Sheng Siong continues to soldier on by opening new stores.
The diagram above shows the steadily rising store count for the group as it ended 1H 2023 with 68 stores with around 613,100 square feet of retail area.
A quick check also showed that Sheng Siong had five stores in China as of 30 June 2023, one more than the same period last year.
In terms of revenue contribution, new stores registered a positive 3.3% increase in revenue for the five new stores opened between 1H 2022 and 1H 2023.
Singapore’s comparable store sales for existing stores saw a slight 1% year-on-year dip in revenue as sales normalised after a sharp surge back in early 2022.
Hence, we can conclude that revenue growth is driven by the opening of more stores around Singapore.
Late last month, Sheng Siong announced that it had secured a lease agreement to open its sixth store in Kunming, China.
This new store will be operational before the end of 2Q 2024 and will bring its Singapore store count to 69 and China store count to six, implying that one more new store in Singapore should open by then.
As for HDB tenders, Sheng Siong is waiting for the result of a bid that it tendered when HDB released two sites for tendering (note: it lost the other bid).
The group also expects six more tenders for the remainder of this year, giving the retailer a good chance of snagging additional sites for new store openings.
Long-term strategies in place
Management has put in place long-term strategies to grow the business.
Higher expenses act as short-term headwinds that will reduce profits but if Sheng Siong can continue to grow its store count and expand its breadth of items, it should continue attracting customers.
A new public housing framework which will kick in from 2H 2024 means that singles can buy 2-room flexi BTO (built-to-order) HDB flats in all regions.
As a result, HDB will launch up to 14,000 two-room flexi BTO flats over the next three years, an increase of around 30% from 2021 to 2023.
In addition, National Development Minister Desmond Lee also said that close to 100,000 private and public homes will be completed between this year and 2025 to make up for the pandemic delay.
This new crop of flats will provide Sheng Siong with ample bidding opportunities in the next few years for new store sites.
Meanwhile, the group will also improve its sales mix to continue to push gross margin higher while increasing the selection and type of house brand products to attract more customers.
Get Smart: Patience will bring rewards
Pessimism may be sending shares of Sheng Siong to a year-low.
However, patience should bring ample rewards as the retailer embarks on its steady expansion plan.
The group looks set to slowly but steadily increase its store count and could see better days ahead as inflation slowly abates.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
