Sheng Siong Group Ltd (SGX: OV8) should be a familiar household name in Singapore.
The supermarket chain has a total of 63 outlets that are located mainly in the heartland areas, serving Singaporeans who live in HDB estates.
The group offers a wide assortment of products ranging from live fish and fresh seafood alongside a range of household items and essentials.
What many investors may not realise is that the supermarket operator also qualifies as a great investment over the years.
It’s useful to conduct a theoretical exercise to compute how much money you’d end up with if you had invested in Sheng Siong back in July 2016.
Such examples illustrate the beauty of long-term investing and show how your money can compound if invested in the right businesses.
Generating wealth for long-term shareholders
Sheng Siong was trading around S$1.00 back in late July 2016.
An investment of S$10,000 would have netted you 10,000 shares.
Fast forward to today, and Sheng Siong’s share price closed at S$1.57.
Your S$10,000 would have grown to S$15,700, for a compound annual growth rate (CAGR) of around 9.4%.
Not too shabby, you may be thinking.
But let’s forget to add in the dividends you would have received along the way.
From 2016 to 2020, the group paid out dividends totalling S$0.205.
Total dividends over the five years will amount to S$2,050.
Add the dividends received into the mix and your S$10,000 would have grown to S$17,750, for a total return of around 77.5% or a CAGR of 12.2%.
Steady store expansion
If you track Sheng Siong’s store growth and operating metrics over the years, you can get a better idea of how the group can deliver such impressive returns.
Store count grew 50% from 42 stores at the end of 2016 to 63 stores in the first quarter of this year (1Q2021).
The total area also increased in tandem with the store openings, going from 450,000 square feet to 575,000 square feet.
More importantly, the revenue generated per square foot of retail space climbed over this period from S$1,826 to S$2,348.
The increase in this metric shows that Sheng Siong was more effective over time in generating revenue for the additional space it takes up.
Sheng Siong’s sales efficiency has helped to boost its top line, but investors should not forget that it’s the bottom line that ultimately matters.
And the retailer has not disappointed on this front, either.
The gross margin has steadily climbed from 25.7% in 2016 to 27.6% in 1Q2021 as the group engages in more efficient sourcing.
The operating margin has also correspondingly climbed from 9.5% in 2016 to 11.2% in 1Q2021.
The increase in margins, along with higher sales and healthy comparable store sales growth, has had a multiplier effect on Sheng Siong’s net profit.
Back in 2016, net profit stood at S$62.7 million.
Four years later, net profit has more than doubled to S$139.1 million.
Granted, some of the increase was due to the effects of the pandemic which boosted demand for Sheng Siong’s products due to increased telecommuting.
However, the margin boost and store increases have helped in increasing net profit as well.
The China connection
Aside from Singapore, Sheng Siong has also trained its sight on China.
The group had just announced the signing of new leases for its third and fourth outlets in Kunming, China.
In its 1Q2021 earnings presentation, Sheng Siong disclosed that revenue for its first two China outlets amounted to just 2% of group revenue.
The good news is that both outlets are profitable.
With the setting up of another two outlets, we can reasonably expect each to contribute around 1% to group revenue.
When up and running, this means that the China outlets’ contribution should remain small at less than 5% of group revenue.
However, this move is important for the group to establish a beachhead in the Middle Kingdom to prepare itself for future growth there.
Get Smart: Poised for further growth
Investors can look forward to further growth for the retailer as it sources more HDB leases.
Sheng Siong intends to continue expanding its network of outlets in Singapore and will start bidding for new space in the later part of 2021 and also 2022.
As hybrid work is expected to continue even after the downturn is over, demand for Sheng Siong’s products should remain healthy.
It’s Fight Night on 29 July…and you’re invited! Crowd favourites, Keppel DC REIT (SGX: AJBU), Frasers Logistics & Commercial Trust (SGX: BUOU), and DBS (SGX: D05) will fight to the end for the title of “Champion of Dividends.” Be the first to find out who wins in this 3-way mayhem on the 29 July. We’ll host a webinar, and together we’ll analyse each contender’s strengths, weaknesses, and potential. To reserve a front-row ticket to this royal rumble, click HERE now.
Disclaimer: Royston Yang does not own shares in any of the companies mentioned.