Home-grown grocery chain Sheng Siong Group Ltd (SGX: OV8) has been chalking up a solid track record of growth since its initial public offering (IPO) in 2011. From 2011 to 2014, the supermarket operator has seen its revenue and net income grow at compounded annual rates of 7.8% and 20.4% respectively. In addition, as a hint of its pricing power, Sheng Siong’s gross profit margin has been inching up steadily from 21.8% in 2010 to 24.2% in 2014. Given that the company is still predominantly a Singapore-based business (the firm entered into a joint-venture to expand into China only back in…
Home-grown grocery chain Sheng Siong Group Ltd (SGX: OV8) has been chalking up a solid track record of growth since its initial public offering (IPO) in 2011.
From 2011 to 2014, the supermarket operator has seen its revenue and net income grow at compounded annual rates of 7.8% and 20.4% respectively. In addition, as a hint of its pricing power, Sheng Siong’s gross profit margin has been inching up steadily from 21.8% in 2010 to 24.2% in 2014.
Given that the company is still predominantly a Singapore-based business (the firm entered into a joint-venture to expand into China only back in last August; more on this later), it’s worthwhile asking: Can Sheng Siong continue to grow its business over the next decade?
There are a few ways for Sheng Siong to grow in the future and I’ll be examining each option.
A simple case of expansion
The most obvious strategy for Sheng Siong is to expand its retail footprint by opening more stores. But, given the fact that it is already one of the largest supermarket chains in Singapore with 37 outlets, the growth opportunities might be limited going forward.
That is also probably why Sheng Siong first proposed a joint venture last August with China-based LuChen Group, a manufacturer and distributor of sauces and condiments, to setup supermarkets in Kunming, China. The joint-venture deal was inked in December and Sheng Siong has a 60% stake with an initial investment of US$6.0 million.
China can be a massive opportunity for the company to continue growing in the future. But, it’s important for investors to realise that China is a very tough nut to crack for retailers and the difficulty might be compounded for Sheng Siong given that it has never had experience running supermarkets in the country.
In light of that, it might be prudent for investors to have lesser expectations on the success of this venture until some concrete results can be seen.
Another way in which Sheng Siong can boost its bottom-line is by improving its profit margin. Given the company’s success in achieving gross profit margin growth over the past few years, as mentioned earlier, Sheng Siong has definitely proven itself to be great in managing its costs.
That being said, Sheng Siong’s net profit margin already seems to be on the high end when compared to its peers.
In 2014, Sheng Siong achieved a net profit margin of 6.6%. In comparison, Dairy Farm International Holdings Ltd (SGX: D01), a pan-Asian retailer with over 6,100 outlets of supermarkets, hypermarkets, convenience stores and more, had managed to clock a net profit margin of 4.6% in the same year. Even Whole Foods Market, a U.S.-based premium and organic grocer, only managed to hit a net profit margin of 4.0% in 2014.
For a company like Sheng Siong, which runs its eponymous supermarkets selling everyday grocery items of mostly the non-premium variety, investors would have to think hard about how sustainable a net profit margin of nearly 7% is over the long term.
Sheng Siong has achieved remarkable results since its IPO.
The company has been focusing on international expansion and margin improvements to drive bottom-line growth these past few years. But, investors would have to observe and determine if these strategies are going to be successful and sustainable over the next decade.
Sheng Siong is currently trading at S$0.83 and at that price, it’s selling for 25 times its trailing earnings and offers a dividend yield of 3.6% (thanks to its annual dividend of S$0.03 per share in 2014).
If you like what you've seen and would like to have access to even more investing analyses and insights, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
You can like us on Facebook too to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns shares in Dairy Farm International Ltd.