The earnings season is now in full swing, and several blue-chip stocks such as Mapletree Logistics Trust (SGX: M44U) and United Overseas Bank (SGX: U11) have reported their earnings.
As more earnings are released, many businesses are seeing the negative impact of both higher interest rates and surging inflation on their bottom lines.
Sheng Siong Group (SGX: OV8) is no exception.
The retailer is witnessing a jump in expenses as inflation begins to bite.
Despite the challenges, the group continues to expand its store network in Singapore as evidenced by its latest fiscal 2023’s first half (1H 2023) results.
Here are five highlights from the supermarket chain’s latest earnings that investors should note.
1. A steady set of financials
For 1H 2023, Sheng Siong reported a 2% year on year increase in revenue to S$690.5 million.
This increase can be broken down into three components – contributions from new stores in Singapore, comparable store sales, and China’s store contribution.
Five new stores were opened in 2022 and 1H 2023 which contributed a 3.3% year on year increase in revenue for 1H 2023.
However, this performance was offset by a 1% year on year dip in comparable store sales and a 0.3% year on year decline in revenue from its five China stores.
From the numbers above, Sheng Siong enjoys the biggest revenue uplift from the opening of new stores in Singapore.
Gross profit inched up 3.1% year on year to S$205.1 million while net profit slid 2.9% year on year to S$65.5 million.
The main culprit for the profit drop was a 9.8% year on year increase in administrative expenses that was contributed by higher staff costs and an increase in utility expenses.
Despite the slightly lower net profit, the retailer posted a 31.7% year on year jump in free cash flow from S$54.9 million in 1H 2022 to S$72.3 million in 1H 2023.
The supermarket operator also held S$289 million of cash on its balance sheet with zero debt.
2. Gross margin continues climbing
Sheng Siong continues its track record of increasing its gross margin.
For 1H 2023, the gross margin clocked in at 29.7%, slightly above the 29.4% recorded in the same period last year.
The group has seen its gross margin creeping up steadily over the years, starting at 27.4% in 2020 and ending at 29.4% in 2022.
The retailer attributed the better gross margin to an improved sales mix of products that sported higher margins.
Investors should note that Sheng Siong offers more than 1,600 products under its 23 house brands and that traditionally, house brands command a better gross margin compared to selling other brands.
3. Increasing its retail presence
Source: Sheng Siong’s 1H 2023 Presentation Slides
The graphic above shows the steady climb in Sheng Siong’s store count over the years.
The group has more than doubled its store count from 33 back in 2013 to 68 in 1H 2023.
Even during the pandemic period of 2020 to 2022, Sheng Siong managed to open new stores, albeit at a slower pace as construction activities were halted.
The retailer’s expansion plan is to open at least three new stores per year.
Thus far for 2023, the group has only opened one store in the first quarter.
CEO Lim Hock Chee has remarked that Sheng Siong’s expansion strategy “remains intact” as the group seeks to open stores in new and existing HDB estates.
The government has committed to completing more HDB estates to cater to pent-up demand for housing.
In late May, around 5,500 new build-to-order (BTO) flats were offered for sale in Bedok, Kallang Whampoa, Serangoon, and Tengah.
August and November 2023 will see another 6,700 and 6,300 BTO flats being offered, respectively.
4. A slightly lower interim dividend
An interim dividend of S$0.0305 was proposed, representing a pay-out ratio of 70%.
This dividend was slightly lower than 1H 2022’s S$0.0315.
Coupled with 2022’s final dividend of S$0.0307, Sheng Siong’s trailing 12-month dividend came up to S$0.0612, giving its shares a trailing 12-month dividend yield of 3.7%.
5. A sanguine outlook
Despite the macroeconomic challenges, Sheng Siong posted a sanguine outlook.
HDB had released two shops which the group tendered for.
It was not awarded the lease for one of them while the other is pending an outcome.
Meanwhile, six more tenders are expected by HDB in the remainder of this year.
Management also believes that inflation will spur more people to reduce non-essential spending, thus increasing their spending on groceries and fresh food.
This behaviour will, in turn, benefit the supermarket retailer as it sells a wide variety of essentials, fresh and chilled foods.
It also intends to continue to improve its sales mix by shifting it towards higher-margin products while increasing the selection and type of house brand products.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
