Sheng Siong 2Q17 Earning Updates July 31, 2017

Consumer staples companies have always form a resilient part of one’s portfolio. Today, I will be giving an update on Sheng Siong latest earnings and insights which investors should be aware of when you are investing into this company.

Based on the earnings reported last Thursday, Sheng Siong has:

1) Grown its 3Q Revenue by 6.8% YOY
2) Improved its Gross Profit Margin by 50 basis points
3) Grown its 3Q Net Profit by 6.1% YOY
4) Retail Area contracted by 1.8%, due to closing of “The Verge Mall”
5) Lower dividend to 1.55 cents, compared to 1.9 cents a year ago.

With no earnings surprises, what could potentially be the factors affecting the shares during a period when STI has climbed to its year high? While there is no certainty what attributed to the drop the last few days, investors should be aware of 2 key events.

1) Intensified competition by E-Commerce companies.

By now you should have heard of “Amazon Prime”, which has launched as an e-shopping platform in Singapore. This new service allows consumers to make purchase via the App (downloadable from iTunes or Play Store) and it is possible for the items be delivered to you on the same day. While they are not the first, as others like Honestbee or Redmart provide such services as well. Having a new entrant to the sector, we might see discount tactics among players to preserve or grow market share. Such competition may erode Sheng Siong gross profit margins and/or market share.

2) Contraction of local retail spaces

FactsheetsSource: Q2 2017 Result Presentation (www.sgx.com)

With the closure of a big retail space in The Verge Mall and Woodlands, Sheng Siong is likely to see a contraction in revenue going forward. Part of Sheng Siong success over the past few years lie in its ability to consistently expand its network of outlets to contribute to the overall top-line growth. They have not been successful in securing new areas in 1H 2017. However, we do see two new local stores (Woodlands and Bukit Panjang) and their China (Kunming) store opening at a later part of this year.

Good or Bad?

While the above are concerning, investors who are vested or looking to invest should always form their own opinion when evaluating investment opportunities. In my personal opinion, I would like to share the following 3 points with investors who are digesting Sheng Siong’s second quarter report.

1) The landscape in Singapore is slightly different compared to other countries such as the US. Most of the time, residents do have supermarkets within close proximity, and such convenience may deter the usage of e-commerce.

2) Inability to tender for new stalls may hinder their topline growth. However, others can argue that this is a wise choice if the tender price does not make economic sense. For the second half of this year, there is still a healthy pipeline of supermarket spaces up for bidding.

3) Sheng Siong interim dividend fell 18.4% and such decline has both good and bad consequences. To an investor, you may have a lower return on investment or dividends for the short term but earnings could be reinvested for the expansion of the company. Such funds can be used to acquire more stores to achieve top line growth that can eventually lead to higher profit and higher dividends in future.

Conclusion

While the intrinsic value of Sheng Siong is anybody’s guess, investors planning to take a stake in this company should be comfortable with the management ability and the future landscape of supermarket business.

If you wish to know more information about stocks, you can speak to your designated Trading Representatives or a Dealer at a Phillip Investor Centre near you.

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About the author

Mr Michael Tay
Equity Dealer

Mr. Michael Tay currently provides dealing services to over 17,000 trading accounts and is part of the POEMS Dealing, the core in-house dealing department of Phillip Securities Pte Ltd.

Michael is a strong believer of value investing, focusing on companies with strong fundamentals and good dividend policy. Apart from his dealing role, he often provides training seminars on Fundamental Analysis topics to further enrich his clients’ financial knowledge.

Michael holds a Bachelor Degree of Finance from the SIM University (UniSIM) and was awarded the CFA Singapore Silver Award in 2012.

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