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Foolish Face-Off: Sheng Siong vs. Dairy Farm Holdings

Duel In this latest instalment of the Foolish Face-Off, we’ll be doing a fair bit of shopping to see which retailer, Sheng Siong (SGX: OV8) or Dairy Farm International Holdings (SGX: D01), will come out tops in a friendly bout.

For those late to the party, the Foolish Face-Off series sees us pitting companies with similar operations against each other in simple contests. The aim’s to help make comparisons easier for investors, who might find such decisions just a wee-bit harder than choosing between laksa or prawn noodles for breakfast!

Introduction

Sheng Siong has come a long way since it was first founded in 1985 by the Lim brothers: Lim Hock Eng, Lim Hock Chee and Lim Hock Leng, who are currently serving as the company’s executive chairman, chief executive, and managing director respectively, in addition to being controlling shareholders.

Back then, the company had only one humble store located at Ang Mo Kio. When Sheng Siong finally went public on August 2011, it had expanded its retail footprint to 26 stores. And today, the company runs its namesake Sheng Siong supermarkets in Singapore in 33 different locations, helping bring fresh produce, groceries and daily necessities to Singaporeans island-wide.

Compared to Sheng Siong, Dairy Farm is a bona fide giant with more than 5,700 retail outlets across various parts of Asia. Shoppers in Singapore might also be familiar with its Cold Storage and Giant brand of supermarkets here.

The company is majority-owned by Jardine Strategic Holdings (SGX: J37), which is in turn part of the sprawling conglomerate Jardine Matheson Group.

Besides supermarkets, Dairy Farm also runs convenience stores, health & beauty outlets, and home furnishing stores of the IKEA brand. Some countries, besides Singapore, where Dairy Farm has a retail presence include Hong Kong, Taiwan, Philippines, Indonesia, Malaysia, Brunei, Vietnam, and China.

  Sheng Siong Dairy Farm
Market Cap S$940.8m US$15.2b
Last 12 month’s sales S$669.8m US$10.1b

Round 1: Valuation

In investing, valuation is an important determinant of future returns. And that’s why we’ll like to see which company’s being priced cheaper in the market in terms of the metrics: Price-to-Earnings (PE); Price-to-sales (PS); and Dividend Yield.

  Sheng Siong Dairy Farm
PE 25.6 34.8
PS 1.4 1.5
Dividend Yield 4.0% 2.0%
Share Price S$0.68 US$11.25
*Dividend Yield figures are based on total dividends paid in the last completed financial year. The rest are based on last 12 month’s financial figures.

We can see that Sheng Siong edges out Dairy Farm here in all three metrics with its higher Dividend Yield, and lower PE and PS. The local retailer Sheng Siong takes this round!

Winner: Sheng Siong

Round 2: Profitability

It’s easy to boost top-line growth – after all, the best way to sell a dollar is to sell it for 50 cents! – but ultimately, it’s the profits that a company makes that matters. That’s why it’s important to keep an eye on the profitability of companies.

In the second round of the Face-off, we’ll be comparing Sheng Siong and Dairy farm’s profit margins and Return on Equity. The former tells us how efficient a company is at turning each dollar of sale into profits while the latter indicates how efficiently the company can turn shareholder capital into profit.

In particular, the gross margin metric is important for retailers as its trend can shed light on the level of pricing-competition the company faces.

  Sheng Siong Dairy Farm
Gross Margins 22.8% 28.7%
Net Margins 5.5% 4.3%
Return on Equity 25.0% 40.5%
*Based on last 12 months’ financial figures

Here, we see Dairy Farm besting Sheng Siong in terms of its gross margins and ROE. The international retailer, Dairy Farm, will take Round 2 despite having lower net margins.

Winner: Dairy Farm

Round 3: Growth

In the Face-off’s final round, we’ll be looking at some numbers concerning the two companies’ growth. Companies that can grow their sales and profits steadily over time should also see their intrinsic value increase in tandem, benefitting investors in the process.

Meanwhile, growing dividends are also important for shareholders as they might point to improving shareholder returns.

  Sheng Siong Dairy Farm
Revenue Growth CAGR 1.1% 9.8%
EPS Growth CAGR 13.7% 7.7%
Dividend Growth CAGR 55.4% 18.0%
*CAGR = Compounded Annual Growth Rate

 

**Financial figures are based on the companies’ last 5 completed financial years except for Sheng Siong’s Dividend Growth CAGR – the company only started paying a divided on 2011.

The table above shows that Sheng Siong has done better in terms of earnings per share (EPS) and dividend CAGR. But, the local retailer has had a much shorter history of dividend payments compared to Dairy Farm.

In this instance, more weight has to be given to Dairy Farm’s dividend-history and so, the company takes Round 3 by virtue of it having a meatier record of paying dividends and a much stronger growth in revenue.

Winner: Dairy Farm

Foolish Bottom Line

Final Score: 2-1 to Dairy Farm!

From a cursory glance at the two companies, it seems that Dairy Farm has the upper-hand. It has a slightly better track record of growth and higher profitability. But, there’s a drawback though, as it commands a heftier premium for its shares compared to Sheng Siong.

In any case, it’s also worth noting that definitive conclusions can’t be made here as there are other important aspects of a business that we’ve not covered. Some notable examples include the companies’ balance sheet strength, their cash flow situation, and the retail-landscape in the countries they operate in.

If you would like to learn more about other businesses, stay tuned as we bring you more Foolish Face-Offs later on.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.