Here’s 1 Positive As Well As 1 Negative Aspect About Sheng Group Ltd As An Investment

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore. The company has a network of 42 stores in the island right now and they are primarily located in the heartlands.

Sheng Siong was established in 1985 and it was only in August 2011 when it listed. Since its listing, the company has been a solid winner. From the close of its trading debut to today, Sheng Siong’s stock price has climbed by 176%.

The company recently reported its 2016 full-year results and it posted some solid growth numbers as compared to 2015. This prompted me to take a deeper look at the company as a potential investment opportunity. In this article, I want to share one positive as well as one negative aspect of Sheng Siong’s business fundamentals that I found.

The positive: A good track record of growth

Here’s a table showing some important numbers from Sheng Siong’s income statement from 2011 to 2016:

Sheng Siong income statement 2011 to 2016
Source: Sheng Siong’s earnings releases

As you can observe, Sheng Siong has been growing its revenue and gross profit in each year for the timeframe given in the table. But that’s not all – the supermarket operator’s gross profit margin has also increased in nearly each year.

As a result, the company’s earnings per share has compounded at an annual rate of 13.5% from 2011 to 2016, outpacing revenue growth of 6.6% per year.

The negative: A high valuation

As investors, we always try to buy something at less than its intrinsic value. In other words, we are trying to buy $1 for less than a dollar.

Howard Marks, the cofounder of the asset management firm Oaktree Capital, once said that investing is about buying things well, and not about simply buying good things. Put another way, even the best business can be a lousy investment if bought at a high valuation.

In the case of Sheng Siong, there’s an argument to be made that the company’s valuation may be high, despite its aforementioned good historical business performance.

To this point, you can see the table below for how some of Sheng Siong’s valuation metrics (the metrics are the price-to-earnings ratio, the price-to-book ratio, and the dividend yield) stacks up against those of the SPDR STI ETF (SGX: ES3). The SPDR STI ETF is an exchange-traded fund that tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

Sheng Siong and SPDR STI ETF valuation table
Source: S&P Global Market Intelligence and SPDR STI ETF’s website

Despite having a higher dividend yield, Sheng Siong has materially higher PE and PB ratios when compared to the market-average.

A Foolish conclusion

In all, it’s obvious to see that Sheng Siong’s business has performed well in the past few years. But, its high valuation right now in relation to the market means that investors need to be sure that the company’s long-term prospects are bright. Otherwise, investing at the current price could mean very little or a non-existent margin of safety.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.