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Have Sheng Siong’s Margins Been Rising Over the Years?

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore, and the group has a network of 54 outlets across Singapore, mainly located in the heartland areas. The stores sell a mix of live food as well as general merchandise, and Sheng Siong also offers 900 products under its 17 house brands. The group opened its first overseas store in Kunming, China, in late 2017, and it plans to open a second there by the end of the current quarter.

Those who are interested in investing in the retail and consumer space in Singapore will notice that Sheng Siong has managed to grow steadily over the years. Even Dairy Farm International Holdings Ltd has remarked that it had market share taken away from it by its competitors over the last few years and is currently embarking on a five-year transformation plan.

I decided to study the five-year margin trend for Sheng Siong in order to ascertain if there have been steady improvements in its overall business. The reason for a five-year selection is to ensure that a long enough time period is chosen to reflect improvements in margins, as these usually take time to manifest.

Margins trend

I looked at three types of margins for Sheng Siong: gross margin, operating margin, and net margin. Note that gross margin has managed to climb slowly but steadily upwards over the years, from 24.2% to the current 26.8%. Operating margin has also improved from 2014 levels, but it has hovered around the 9.5% level for the last three years. Similarly, net margin has also improved from 6.6% to the current 7.9%, but it has stalled out around the 8% mark.

Superior sourcing capabilities

Rising gross margins are generally a strong indicator for pricing power. However, Sheng Siong is positioning itself as one of the lowest-cost supermarkets in Singapore selling affordable groceries and merchandise. Therefore, its gross margin improvement is more the result of better sourcing techniques, increased bargaining power with suppliers (to obtain bulk discounts), and also the construction of a distribution centre to enhance its supply chain management.

In other words, the group improved its cost of goods sold structure and lowered it progressively over the years, rather than charging customer higher prices. In an inflationary environment where food and grocery prices have a tendency to rise every year, being able to maintain prices for its customers makes Sheng Siong a very attractive proposition, which explains the growth in revenue and net profit for the group over the last five years.

Expense control

The group may have hit a roadblock when it comes to improving operating and net margins, though, as the improvements in gross margin over the years did not translate into a steady and sustained improvement in both operating and net margins. Due to the rising costs of rental and manpower, Sheng Siong may face an uphill task in trying to control expenses and maintain its margins, but thus far, it has done an admirable job.

Valuation and prospects

Overall, Sheng Siong has demonstrated its ability to continue to improve gross margin, which is impressive considering retail is a tough and cutthroat industry. However, the group may have to innovate further in order to reduce curb expenses growth by relying on more automation, perhaps. Investors can also look forward to some growth in China, though the contribution, if any, will be small.

Sheng Siong trades at a historical price-to-earnings ratio of around 23 times at the last traded price of S$1.09, and it offers a dividend yield of 3.1% (FY 2018 dividend of 3.4 Singapore cents paid twice yearly).

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Sheng Siong Group Ltd and Dairy Farm International. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.