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3 Reasons To Be Bullish On Sheng Siong Group Ltd

Sheng Siong Group Ltd (SG:OV8) shares has risen 25% year-to-date, making it one of the strong gainers for the year so far.

The stock’s performance is impressive, considering that the Straits Times Index (SGX: ^STI) is down around 6% this year. Despite the run-up in Sheng Siong’s shares, here are three reasons why I believe that the stock still has room to run.

1. Increasing store count

Sheng Siong Group has been consistently expanding its store network since its initial public offering (IPO) in 2010. Sheng Siong Group has increased its store count from 22 to 48 as of June 2018.

The group opened four new stores within the first half of the year and continues to seek opportunities to expand its store count. It has also opened two new stores in July in Bukit Batok and Yishun. These new stores will start contributing to revenue in the next quarter.

2. Comparable same store sales growth

Sheng Siong continues to see positive organic growth from its existing stores. In 2018’s second quarter, comparable same store sales increased 4.2%. Meanwhile, Sheng Siong’s flagship supermarket in China increased its sales by 0.9%. The company delivered organic growth amid competition from online players such as RedMart and HonestBee. While its competitors have struggled – for instance, Cold Storage and Giant operated by Dairy Farm International Holdings Ltd (SGX: D01) – Sheng Siong’s saleshave thrived.

Together with the sales contribution from its new outlets, revenue and net profit for the first half of 2018 increased 5.4% and 6.5% respectively.

3. Management expertise in increasing profitability

Over the long term, Sheng Siong’s management has shown their ability to improve the group’s profitability. The chart below illustrates the gross profit and gross profit margin trends over the last eight quarters.

Source: Sheng Siong Group’s latest earnings presentation

As you can see, gross profit margin has widened from 25.9% to 27.3%, while gross profit has improved from S$52.5 million to S$58.1 million over this period. Management has made it a point to shift its product mix to fresh items, which command higher gross margins as compared to non-fresh products. This has worked wonders for its margins and ensures that more of the company’s sales can be filtered down to its bottom line.

With the group continuing to improving its product mix in the future, we can expect to see profit margin improvement in the next few quarters.

The Foolish bottom line

Sheng Siong’s share price has reflected the positive results from the company.

Although its share price has risen considerably over the past eight months, I believe there is upside for investors. At its current price of S$1.16, Sheng Siong shares sport a price-to-earnings multiple of around 24 and a price-to-book ratio of 6.2. At first glance, the valuation may seem expensive. But considering the company’s track record and management nous, Sheng Siong shares might not really be as expensive as it looks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of  Sheng Siong Group Ltd. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.