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Grocer Sheng Siong Shops To Higher Profits

ShengSiongLogo Supermarket chain owner Sheng Siong (SGX: OV8) announced its third quarter results yesterday evening.

Some basic numbers

For the three months ended 30 Sep 2013, revenue grew 4.8% year-on-year to S$178m while profits increased by 7.8% to S$10.6m.

Earnings per share also grew 7.8% to 0.765 Singapore cents.

The supermarket-chain’s revenue for the quarter had increased mainly due to additional sales of S$12.6m coming from new stores. That helped offset a decline in comparable same store sales (comps) – sales from stores open more than 12 months – of S$4.5m.

Sheng Siong’s lower comps were due to a number of factors. Matured stores in older housing estates have been seeing declining sales (an issue that was also highlighted in the company’s second quarter earnings release) while construction activity in the vicinity of the company’s Bedok Central and The Verge stores had negatively affected their business.

In addition, the company had faced stiffer competition, likely from rivals such as NTUC or Dairy Farm Holdings (SGX: D01). The latter owns the Cold Storage and Giant brand of supermarkets, among others.

The company had managed to slash some costs which accounted for the higher growth rate in profit as compared to revenue. In particular, cost of sales – the cost of the goods that Sheng Siong stocks its shelves with – and distribution expenses had shown improvement.

For some operational highlights, Sheng Siong’s total retail area is now 400,000 square feet, an increase of 2.3% compared to a year ago. The company currently has 33 stores, up from 31 in the previous year.

What’s next for Sheng Siong

Staff and food costs are on the forefront of the company’s thoughts as they expect to see a rise in them in the future.

Keen competition among industry-peers has also led to Sheng Siong considering buying up retail space as renting new outlets “could be challenging going forward”.

A key component of the company’s growth strategy is to expand retail space in Singapore, especially in areas where it does not have a presence. In addition, Sheng Siong’s looking at sprucing up its older stores in a bid to drive up comps.

The company’s also actively pursuing initiatives to widen its profit margins and they include the increase of direct sourcing and bulk handling; improvement in sales mix of higher margin products; and an increase in the selection and types of housebrand products.

There have been year-on-year improvements in profit margins at the company since at least the second quarter of 2013, so it seems they are working.

Lastly, Sheng SIong’s pilot e-commerce project is pencilled to start in the fourth quarter of the year.

Valuation

Sheng Siong last closed at S$0.625 per share. This values the company at 23 times trailing earnings with a dividend yield of 2.8% based on its pay-out last year.

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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.