The Better Supermarket Stock: Sheng Siong Group Ltd vs. Aeon Co. (M) Bhd

There are 771 securities listed on Singapore’s stock market as of November 2015. That seems like a big number. But for investors who are interested in companies that run supermarkets, there is actually a very limited selection of stocks to choose from.

One easy way for investors here to expand their opportunity set would be to look across the Causeway to Malaysia’s stock market, where there were 1,739 counters listed as of end-2014.

But, just because there are more choices in Malaysia’s stock market does not mean that investors can necessarily find stronger companies. With this in mind, let’s see how home-grown supermarket operator, Sheng Siong Group Ltd (SGX: OV8), would fare against Malaysia-listed supermarket and convenience store retailer, Aeon Co. (M) Bhd (KLSE: 6599.KL), from an investor’s perspective.

As investors, what we’re interested in ultimately is the quality of a stock’s underlying business and the price we’re paying to own a piece of that business. There are many financial metrics that can shed some light on such matters, but in here, we’d be looking at the two companies’ price-to-earnings (PE) and price-to-book (PB) ratios, their returns on equity, ability to generate free cash flow, and balance sheet strength.

Valuation numbers

It never makes sense to overpay for a company’s stock and that’s why it is important for us to have a feel of how a business is valued in the market.

Sheng Siong and AEON - PE and PB ratios
Source:   S&P Capital IQ   (click chart for larger image)

Based on Sheng Siong and Aeon’s current share prices of S$0.84 and RM2.70, respectively, the two companies have very similar PE ratios. But on the basis of the PB ratio, Aeon triumphs over Sheng Siong with a much lower valuation.

Return on equity

The return on equity metric is an indication of how efficient a company is in generating a profit with each dollar of shareholders’ capital that it has at its disposal.

Additionally, the return on equity can be a good gauge of the capabilities of a company’s management team. “We believe a more appropriate measure of managerial economic performance to be return on equity capital,” billionaire investor Warren Buffett once wrote.

We can see how Sheng Siong and Aeon’s returns on equity have looked like since 2011 in the chart below (a longer track-record isn’t shown because Sheng Siong was listed only on August 2011):

Sheng Siong and AEON - Return on equity (ROE)
Source:   S&P Capital IQ   (click chart for larger image)

This is an area where Sheng Siong has a clear edge over Aeon given the former’s much higher returns on equity.

Ability to generate free cash flow

Free cash flow is an important metric investors may want to focus on when assessing companies. It is the actual cash brought in by a company’s operations that’s left after the firm has spent the necessary capital needed to maintain its businesses at their current state (this is known as capital expenditures).

With free cash flow, a company can then use it to benefit shareholders in a number of different ways including buying back stock, paying dividends, strengthening the balance sheet, and investing for future growth.

Sheng Siong and AEON - Free cash flow (FCF)
Source:   S&P Capital IQ; author’s calculations   (click chart for larger image)

Both Sheng Siong and Aeon have unfortunately had spotty track records in terms of generating free cash flow over the past few years, as shown in the chart above. As such, it will be a tie between the two firms here.

Balance sheet strength

Walter Schloss, an investor with a phenomenal multi-decade track record, once said: “I don’t like debt because it can really get a company into trouble.” It’s a simple statement, but it manages to point out the risks that shareholders have to face when a company takes on debt, especially in excessive amounts.

It is thus important to observe how a company’s balance sheet has evolved over time. If you ever find that a firm is biting off more than it can chew when it comes to debt, it may be time to bail on the company.

In terms of the health of their balance sheets, Sheng Siong once again moves one-up over Aeon. As of 30 September 2015, Sheng Siong’s balance sheet contained S$126 million in cash & equivalents and zero debt whereas Aeon had just RM88.7 million in cash & equivalents but RM555 million in total borrowings.

A Fool’s take

In a final tally, Sheng Siong’s the ultimate winner here as it had bested Aeon in two of the four categories. But, it should be noted that all that we’ve seen above shouldn’t be taken as the final word on the investing merits of the two companies. Instead, it serves mainly as a useful starting point for further analysis.

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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 writer Chong Ser Jing doesn't own shares in any company mentioned.