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Would Peter Lynch Buy Sheng Siong?

ShengSiongLogo2If there is one business that is easy enough to describe with a crayon, it is a grocer. Consequently, Singapore’s third largest supermarket, Sheng Siong (SGX: OV8), should easily pass Peter Lynch’s “crayon test”.

But would that be enough to sway Peter Lynch?

Lynch likes companies that can grow. In the case of Sheng Siong, top-line sales have not exactly been zooming ahead that quickly. Since 2008, revenues have only increased 13%, which equates to an annual growth rate of just 2%.

That said, bottom-line profits have been on a bit of a tear. Over the last five years, net income has nearly doubled from S$20.6m to S$38.9m. That equates to an earnings growth of around 14%, which puts its forward PE ratio of 19 into perspective. It implies a Price-to-Earnings-to-Growth (PEG) ratio of 1.3.

Apart from a reasonable PEG ratio, Peter Lynch is also on the lookout for companies with low levels of debt. In the case of Sheng Siong, its debt levels couldn’t be any lower because it has none. In fact, it is sitting on S$112m of cash.

Peter Lynch wants more, though. He is also looking for companies whose dividends and payout ratios are adequate. In the case of Sheng Siong, it paid a dividend of S$0.02 in 2011, which increased to S$0.03 last year. The payout ratio is 99.7%, which Lynch might consider to be on the high side.

As a further check on a company’s health, Peter Lynch likes to see low inventory levels – the lower the better. Sheng Siong is quite efficient in that area. It turns over its inventory around 15 times a year. By comparison, rival grocer Dairy Farm (SGX: D01) turns over its inventory about eight times a year.

On balance, Sheng Siong is unlikely to get Peter Lynch reaching for his cheque book and pen. That is unless the grocer can get its top-line revenues moving faster. Or put another way, it needs to show that it can grow.

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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 Director David Kuo doesn’t own shares in any companies mentioned.