Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore. The group runs 54 outlets across Singapore that are located primarily in the heartland and HDB areas of the island. The stores carry a wide assortment of live, fresh, and chilled produce as well as general merchandise such as toiletries and essential household products.
I’ve written previously about Sheng Siong’s improving gross margins but cautioned about its operating and net margins. Investors also need to be comfortable with the group’s growth plans, as it faces stiff competition from the likes of NTUC FairPrice and Dairy Farm International Holdings Ltd (SGX: D01). With so many moving parts, investors may wonder how to value the group, and whether its shares are cheap or expensive.
Here are three different methods investors can use to value Sheng Siong.
No. 1: Price-to-earnings ratio
One of the most common methods analysts use to value companies is the price-to-earnings ratio, or the P/E ratio. This simply takes the share price and divides it by the company’s earnings per share. The P/E ratio tells investors how many years it will take for the company to earn back the profits to cover the price paid for it. For example, if the P/E ratio was 20 times, the company needs to generate the same profit for 20 years in order for the investor to recoup his investment in full.
I used Sheng Siong’s FY 2018 earnings per share — 4.71 Singapore cents — as a reference. At Sheng Siong’s last traded price of S$1.16, the P/E ratio is therefore 24.6 times. This seems fairly high considering the group may not be able to grow as fast in Singapore as it has over the last ten years. But investors should compare that P/E ratio to those of other listed peers in the region instead of looking at the number in isolation.
No. 2: Price-to-book ratio
A second method used to value a company focuses on its asset base and calculates how much of a premium or discount an investor is willing to pay for those assets. This is known as the price-to-book ratio, or P/B ratio, and is usually used for asset-heavy companies.
Using Sheng Siong’s net asset value as of 30 June 2019 of 20.06 Singapore cents, investors are paying around 5.8 times the group’s book value. This suggests there is additional value to what the group has on its balance sheet, which is why investors are willing to pay such a premium. This may be in the form of strong customer loyalty, dominant market share, track record and reputation, or technical know-how.
No. 3: Price-to free-cash-flow ratio
The third and arguably most robust method is to use the price-to-free-cash-flow ratio, or P/FCF. Free cash flow represents the lifeblood of the business, and this ratio shows how many times investors are willing to pay to grab a slice of the company’s cash flow. The formula is similar to that of the P/E ratio, except earnings per share is substituted for free cash flow per share.
Sheng Siong’s FY 2018 free cash flow per share amounted to about 4.26 Singapore cents, making the price to free cash flow 27.2 times.
Which is most appropriate?
There is technically no “right” method, as these are simply different ways of assessing the value of a company, be it earnings, assets, or cash flow. However, investors may wish to use a combination of methods in order to determine if a company’s shares are too pricey (or suspiciously dirt-cheap). It’s also a good idea for investors to check these ratios against those of peers and competitors in order to get a sense of where the company stands within its industry.
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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 Holdings Ltd. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.