The retail scene in Singapore is constantly shifting as major players grapple for market share.
A recent announcement by Sheng Siong (SGX: OV8) confirms this.
The retailer, which owns 73 outlets across Singapore, entered a sale and purchase agreement with Jelita Property Pte Ltd to acquire the latter for S$50.2 million.
Jelita Property owns eight strata units located at 2 First Street in the development known as “Siglap V”.
It also owns a leasehold interest in 181 Toa Payoh Lorong 4.
What is Sheng Siong’s purpose in acquiring Jelita Property? Should investors turn positive on the stock?
Increasing its store count
Management believes that the acquisition of the Jelita properties will allow the group to open additional stores and receive additional rental income.
How will this work?
Jelita’s leasehold interest in 181 Toa Payoh Lorong 4 comprises a ground-floor unit at a commercial HDB block.
Giant, a hypermarket brand under DFI Retail Group (SGX: D01) [“DFI”], announced the closure of its outlet at this location and moved out on 15 September.
This shifting out ties in nicely with Sheng Siong’s plan to steadily increase its store count in the heartland areas.
From 2020 to 2023, Sheng Siong opened six stores at an average rate of two new stores per year.
However, for its recent first half of 2024 (1H 2024) earnings release, the supermarket operator communicated its intention to open “at least” three new stores yearly.
The good news is that two new stores were already opened in 1H 2024 with another two opened in July 2024, taking the total number of new stores year-to-date to four.
With this acquisition, Sheng Siong can add another new store to the list to make it five once the renovation and fitting-out are completed.
Management also revealed that three HDB tenders are awaiting results while seven more tenders will be put up in 2H 2024.
These numbers demonstrate good potential for Sheng Siong to open more stores in the coming months if the retailer manages to clinch these tenders.
An additional revenue stream
As for the strata units at Siglap V, these will involve a leaseback arrangement by DFI for around 10,624 square feet of space.
The pan-Asian retailer had put up these two properties for sale in April 2024 to lease back the Siglap V property where its CS Fresh and Guardian brands are located.
Sheng Siong will thus earn rental income from leasing out this space to DFI, helping to increase its rental income stream.
The group will also benefit from capital appreciation of these properties.
The acquisition’s completion should take place on 30 October 2024.
Healthy financial performance
Sheng Siong also reported a robust financial performance for 1H 2024.
The retailer saw revenue rise 3.4% year on year to S$714.2 million, aided by a longer sales period before this year’s Lunar New Year.
Gross profit climbed 4.8% year on year to S$215 million with gross margin touching 30.1%, up from 29.7% a year ago.
The better margin was attributed to a favourable sales mix.
Sheng Siong’s gross margin has been on a steady climb, going from 27.4% back in 2020 to 30% last year.
Net profit improved by 6.8% year on year to S$70 million.
The supermarket operator also generated a healthy positive free cash flow of S$86.7 million, 20% higher than the previous year’s S$72.3 million.
The group declared an interim dividend of S$0.032, up from the S$0.0305 paid out a year ago.
Over in China, Sheng Siong also opened its sixth store in Kunming and its subsidiary in China continued to be profitable.
Get Smart: Management is aiming to grow its presence
Sheng Siong’s purchase of Jelita property seems like a savvy move to not only increase the retailer’s store count but also open up an additional revenue stream.
Meanwhile, the group is focused on growing its presence in the HDB heartlands with the opening of more stores this year.
Management will continue to improve the sales mix towards higher margin products and also increase the selection and types of house brand products to attract more customers.
With a free cash flow generative business that pays twice-yearly dividends, both income and growth investors have something to look forward to.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
