The last two years have seen a surge in people telecommuting and studying from home.
Sheng Siong Group Ltd (SGX: OV8) has been a key beneficiary of this shift.
The supermarket operator has enjoyed soaring revenue and net profit as more people shopped at its stores for fresh food and necessities.
The group recently released its fiscal 2021 (FY2021) earnings.
Here are five highlights that investors should note.
1. A steady set of earnings
For FY2021, revenue dipped 1.7% year on year to S$1.37 billion.
However, gross profit inched up by 3% year on year to S$393.3 million.
The gross profit improvement can be attributed to a rise in the group’s gross margin from 27.4% in FY2020 to 28.7% in FY2021.
Operating profit fell by 2.4% year on year to S$162.2 million. While net profit dropped by 4.2% year on year to S$132.8 million.
As a whole, Sheng Siong’s reported a respectable set of results for FY2021 considering they came off a high base in FY2020 when the pandemic resulted in a surge in purchases in the second quarter that year.
Moreover, government grants were reduced from S$34.8 million in FY2020 to just S$4.8 million in FY2021.
The good news is that the group continued to generate a free cash flow of S$141 million for FY2021.
2. Consistent gross margin improvement
Sheng Siong has managed to slowly raise its gross margin over the years.
The key initiatives include smart sourcing (i.e. bulk purchases from supplies), a favourable sales mix, and its 23 house brands (note: house brands usually command higher gross margins).
As a result, gross margin increased from 26.2% in FY2017 to 28.7% in FY2021, with every fiscal year registering a steady rise in this financial metric.
Impressively, for the second half of FY2021, gross margin hit as high as 29.2%.
However, moving forward, these increases may moderate (see risks section ahead).
3. Increasing its store count and retail area
The group managed to secure three new stores in FY2021, one of which opened on 30 December last year.
Earlier in 2021, Sheng Siong had found it tough to secure leases as measures are taken to curb the spread of COVID-19 that affected the supply of HDB flats.
As of end-2021, the group had a total store count of 64 in Singapore and four in Kunming, China.
Total store retail area increased from 571,000 square feet (sqft) in FY2020 to 577,000 sqft in FY2021.
It intends to open another two stores in the first half of 2022 (1H2022), which should increase its total store count to 66.
4. Two risks lie ahead
To be sure, management did highlight some risks to its growth.
The first involves the easing of safe management measures that may cause elevated demand for its products to dwindle as more people engage in other activities such as travel.
The second risk is that of escalating prices due to the disruption of supply chains and higher energy prices leading to inflation.
Higher costs of goods may crimp the group’s gross margins in the near term.
However, Sheng Siong will diversify its suppliers and work closely with them to minimise these effects.
5. Slightly higher final dividend
A final dividend of S$0.031 was declared, slightly higher than the S$0.03 declared last year.
For FY2021, a total dividend of S$0.062 was declared, slightly lower than the S$0.065 paid last year.
The group’s dividend payout ratio has remained consistent at around 70% of its earnings over the past five fiscal years.
At Sheng Siong’s last traded share price of S$1.52, the trailing dividend yield stands at 4.1%.
Get Smart: Store expansion is a growth catalyst
Despite the slightly weaker result, investors should note that it’s due to the combination of last year’s high revenue base as well as the group’s inability to bid for new storage space for most of FY2021.
That said, Sheng Siong has managed to secure two new leases that should begin operations this year, thus adding to its continued store expansion plans in Singapore.
Meanwhile, its store count has also increased from 59 in 2019 (before the pandemic) to 64 stores in 2021.
In 2022, we should expect that figure to increase to 66 stores.
Elsewhere, its China stores, now numbering four, are also profitable.
The group will carry on with margin enhancement initiatives by increasing the selection and types of house brand products, while also looking to further grow its China presence.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
