The financial situation is still rather rocky, amidst a few short rallies now and then. I believe the rally of oil prices are definitely contributing to the recovery of the economy. From its lowest of ~26(?) to the current prices of ~40. It is definitely staging a strong comeback. However, the lagging growth of China is still weighing on investor sentiments globally. The effects do seem to be cancelling each other out in general, since we have a bull (oil) and a bear (china) right now, as compared to both the bears months ago. Should China's growth recover I believe a bull market might be back in place, although this might be far from the present, given the fact that China has been growing rather exponentially for the past decade.
While I personally do not involve myself in commodities nor cyclical markets, the ripples caused by the falling oil prices do open up opportunities in other segments of the market. One of the more obvious example were definitely the banks, where sentiment soured after realizing the NPL of banks might increase due to the defaults arising from the O&G industry. I seem to be getting off topic already so lets get back to...
Sheng Siong
1. Business outlook
I believe anyone reading this would know of Sheng Siong (I'll call it SS from now on), since its everywhere and sell stuffs everyone needs. Retail goods is in itself a rather sustainable industry, as we always need ...stuff right? It is also very easy for them to phase out or bring in new products as the market changes, be it the rising trend of organic foods, Japanese products, that Korean spicy instant noodles and the like. Therefore bottom line is I believe their business will continue to survive in the years to come, that is the bedrock of all my investments - sustainability.
As usual, for the people interested in the numbers, here's the excel link :
https://drive.google.com/file/d/0B1fcD_lJpW6hR01mc2VGY2JrUnc/view?usp=sharing
Given the high volatility in the Asian markets, I would say SS is quite defensive in nature and prices have not fallen far from its peaks. As a matter of fact, their earnings are still increasing in FY2015 compared to FY2014, probably because even in financial crisis people still need their maggi mee, shampoo and.. you know.. stuffs. This company could provide investors a relatively safeer growth stock while providing decent dividends no matter what state the economy is in.
Onwards to competitors, I believe names such as NTUC, cold storage, and 7-11 could pop to mind. Firstly, I have been observing quite a few branches of these stores myself. I would say the greatest competitor would be NTUC, as cold storage's goods are rather distinct from SS as they are dealing with higher-priced premium products. Basically if you have something you want to buy in CS, you will go to CS. SS probably doesn't carry that particular product that's why you go to CS, for generic products I believe people will still go to SS over CS, given the accessibility and pricing.
Now comes NTUC, NTUC will never collapse, I hope that day never comes, because it would probably be disastrous. However, I like the fact that SS doesn't attempt to compete with NTUC and each of them ventures in their own strength. I would say NTUC caters to more large scale consumers such as shopping malls, and the occasional marketplace. SS however, pops up in locations you didn't knew existed. While this limits its customers to the neighborhood its in, the costs of operation are not high to do this. They do not need a huge amount of inventory either. As long as they are meeting demands, profits are there. In fact there's a SS right below my block, and if I wanted a carton of milk right now would I drive to NTUC in Jurong East? Definitely not.
NTUC is bigger and might be slightly cheaper, but trust me when I say if I were to go down now there would still be people buying stuff from SS. That's the power of convenience. Sure, if I wanted to stock up on groceries I might head down to NTUC on a saturday and get lots of stuff, but that's not the battlefield SS is in, SS profits from the few products you forgot to buy from NTUC or you know... you ran out of it and you're too lazy (and smart) to drive down to park at a $1.50/hr shopping mall parking lot to buy a carton of milk at NTUC. Oh and you're probably not going to 7-11 for that as you probably know, you're getting ripped off.
2. Financials
*Most discussion here are done with regards to the data in excel in case you're wondering.
2.1. Revenue
Revenue throughout the years is showing growth, at 3.32%. The chart below shows Singapore inflation rate.
Looking at the chart, Singapore's inflation averages out to be about 2% a year for the past 6 years (since SS's inception). With a revenue growth of 3.32% it is beating inflation rather well. This shows that other than simply raising prices due to inflation, their management is doing something to increase revenue, and doing it right.
2.2 Gross profit margin
While a growing revenue is good, its useless if costs grow as much as, or even higher than it. That's not the case for SS - showing a growth in profit margins from 21% in 2010 to 24.7% in 2015. This could prove that management is consistently taking steps to reduce costs and improve efficiency. One of the major factors I like to look at.
2.3 Net profit attributable to shareholders
Here we go investors, here's our money. Net profit has been growing strongly since SS's inception, at a compounded annual growth rate (CAGR) of 4.89%. Looking at the margins, it would seem that other than streamlining their cost of sales, SS also cut down operations expenses resulting in more profit for shareholders. Net profit margin improved from an average of 6% to 7.42% in 2015, hitting new highs.
2.4 Shares outstanding
The great improvements in net profits is however clouded by a relatively high issuance of new shares throughout the years too, coming in at a CAGR of 4.72%. Which means net profit growth is only slightly higher than shares dilution rate.
2.5 Assets & liabilities
One great thing I like about SS is that it has no debts. SS paid off its remaining debts in 2010, as shown in the non-current liabilities. No debts! Given the fact that it's a medium-sized company its understandable that it doesn't need to issue debt for funding, but having a self-funding business is definitely a major factor in sustainability and volatility avoidance. Interest rate hikes? Doesn't effects it. Having a bad year? Doesn't matter, don't owe anyone money.
Debt ratio is constantly improving yearly from 1.33 (that's already decent) to 3 in recent years, which is much higher than average. As a matter of fact, SS's quick ratio/acid test ratio is consistently over 1 after 2010. This means that SS's cash on hand is enough to pay off any liabilities it has for the entire year. That spells out safety better than anything else.
2.6 Inventory Turnover
SS has an average inventory turnover ratio of 12 throughout the years, save for 2010 where it is much higher. This translates to having a inventory of about 1 month worth of sales. It's very good since this demonstrates efficiency in inventory management. Maintaining a low inventory eliminates spoilage of goods from various reasons and also storage costs. However it cannot be too low as then it might be unable to meet demands. I do not believe this will happen though, since I seen them catering to the recent burst of sales during CNY2016 rather well.
A low inventory ratio also means that SS are selling the stuff they buy rather well, as a unnecessary growth in inventory usually means difficulty in clearing products.
2.7 Net asset value (NAV) and pricing
All good things must come to an end, such is the case for SS, where all the good points mentioned previously probably resulted in a much higher NAV/price than average. SS sits in at an average of 5.57 NAV/price. Which means should the company liquidates we are only getting 18 cents on the dollar. NAV is however growing at a rather solid pace of 8.66% CAGR. (2011-2015)
With the share price growing at 14.3% CAGR (2011-2015), there is still some catching up to do for the NAV. This could be rather evidently observed by the recent stagnation in price, as shown.
With Singapore's inflation rate being so low recently, an increase in inflation from bull runs could also result in increased earnings from SS simply due to price raises, which means shareholders are getting more money.
2.8 Dividends
Sheng Siong pays a rather strong dividend, achieving over 4% yield every year. Taking the fast growth of share price into consideration, this is quite an accomplishment. However, there is no buffer for downturns as SS pays out over 90% of its net profits as dividends - this can be seen in the excel sheet and SS actually declares this themselves in the annual report. I do not feel much volatility from this lack of buffer however, since compared to REITs (which also does >90% payouts), the industry SS is in is much more stable.
3. Conclusion
I believe there wouldn't be much better deals out there taking into consideration the efficient frontier of investment theory. Assuming a stable flow of profits, and thus dividends, ~4% a year doesn't sounds like you will lose much in opportunity costs either even if you might have something slightly better. I wouldn't say SS dividend payout is inferior to REITs even though they are both paying over 90% and REITs averages a yield of 6%, given the volatility of the property market. Again, its all about risk-reward.
Share price wise there might be some appreciation to come should Singapore inflation rates get back on track, as mentioned above. This is assuming investor sentiment is strong enough to maintain the current NAV/price. Even if it doesn't, going by inflation of prices alone, SS should result in more profits and that could push dividend yields up. Good enough.
While this wouldn't be a cash cow, SS could serve well as a defensive segment in anyone's portfolio.
On a side note, I feel better buying stuff from SS knowing that I am a shareholder. Which is why I always convince my friends to buy stuff from SS ;)
Happy investing!
Aiyoh ,I know where u stay liao... jurong w... blk 5.. ?
ReplyDeletehahahah hello ken, yep :D
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