Sheng Siong saw its share price surge during the pandemic as investors believed that more people would shop at the group’s stores during the lockdowns.
The retailer’s share price went from S$1.06 at the beginning of 2019 to its all-time high of S$1.85 on 11 August 2020.
Since then, investors appeared to lose interest in the supermarket operator with shares dipping by 6.3% year to date to S$1.49, close to its 52-week low of S$1.46.
Is this dip a superb buying opportunity? Or could the retailer’s share price continue to languish?
Let’s dig deeper to find out.
Improved financials
Sheng Siong has demonstrated its ability to steadily grow its revenue and net profit over the years.
Of course, the pandemic did help to lift its fortunes to a new level but the group has continued to impress with its improving financials despite the lifting of pandemic-related measures.
From 2018 to 2023, the supermarket operator grew its revenue from S$890.9 million to S$1.36 billion for a five-year compound annual growth rate (CAGR) of 9%.
Net profit did even better, logging up a CAGR of 13.7% and growing from S$70.5 million in 2018 to S$134 million in 2023.
The retailer’s annual dividend also rose by 13% per annum, going from S$0.034 to S$0.0625 over the same period.
To top it off, Sheng Siong also generated healthy positive free cash flow for all six years (2018 to 2023 inclusive).
For the first quarter of 2024 (1Q 2024), Sheng Siong has continued its track record of growth.
Revenue rose 5.5% year on year to S$376.2 million while net profit climbed 8.9% year on year to S$36.3 million.
Steadily-increasing gross margin
Another impressive feat delivered by management is the consistent increase in the group’s gross margin.
Gross margin stood at 26.8% in 2018 and improved to 30% by 2023 for a 3.2 percentage point increase.
1Q 2024’s gross margin came in at 29.4% and was higher than the 28.8% chalked up in the previous corresponding period.
Management attained this steady increase by continually improving its sales mix to include higher-margin items from its house brand collection.
The group also drove supply chain efficiency by ordering in bulk and adopting new technologies while streamlining its operations, moves that have helped it to achieve greater efficiency and better margins.
Expanding its store presence
Sheng Siong has been steadily expanding its presence in Singapore over the years.
Back in 2018, the group only had 54 stores around the island but the number of stores has increased every year to 70 for 1Q 2024.
Over a five-year-plus period, the retailer has added 16 more stores and expanded its retail area from 496,200 square feet to 623,700 square feet.
Management plans to open at least three new stores this year with one new store already opened in 1Q 2024.
New stores can help to drive the business’s top and bottom lines and should be seen as a proxy for the supermarket operator’s continued growth.
There could be more to come as the group is awaiting the tender results for four HDB stores that it bid for.
Management also expects six new tenders to be put in for the remainder of this year.
Growth opportunities abound
There is still a lot of room for making further inroads into HDB estates.
The government is set to launch more than 8,500 HDB units in a build-to-order (BTO) exercise in October 2024.
These new flats will be located in mature towns such as Ang Mo Kio, Bedok, Jurong West, and Pasir Ris, to name a few.
Over at the new Mount Pleasant site, the first BTO project is slated to be launched in 2025.
This is just one of six planned HDB launches in this area which should comprise a total of 5,000 flats.
With more HDB flats set to be built over 2025 and 2026, Sheng Siong will have ample opportunities to tender for more shop spaces.
Get Smart: An undemanding valuation
Shares of Sheng Siong are trading at their lowest valuation in the last decade.
Source: TIKR
The average 10-year price-to-earnings (P/E) ratio for the retailer was around 21.2 times.
If we annualise the 1Q 2024 earnings per share of S$0.0242, we get an earnings per share of S$0.0986 which implies the P/E ratio is just 15.4 times based on a share price of S$1.49.
Sheng Siong’s steady store expansion and rising gross margin, along with its rising top and bottom lines, should help to lift its share price from the doldrums in time to come.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
