Sheng Siong Stock: Near-Term Earnings Weakness Represents Buying Opportunity

May 9, 2023

With the reopening of the Singapore economy and removal of all COVID-19 restrictions, we have seen more people dine out this year while shopping malls and food centres are buzzing with activity.

This marks a significant change from last year, when COVID-19 restrictions had only started to ease from late April.

This normalisation of consumer behaviour in the post-COVID era is having an impact on one of Singapore’s supermarket operators, Sheng Siong Group (SGX: OV8).

Net profit  for Sheng Siong was down by 5.2% year-on-year (yoy) to S$33.4 million while revenue dipped by 0.4% yoy to S$365.5 million.

However, despite the near-term earnings weakness, I believe this represents a compelling buying opportunity for investors to own a great business like Sheng Siong.

Here are four strong reasons why.

1. Gross margin continues to climb despite weakness in earnings

Revenue for Q1 2023 dipped by 0.4% year-on-year to S$356.5 million as demand normalised with the easing of pandemic-related measures.

Gross profit, however, managed to inch up 0.1% year-on-year to S$102.8 million, with marginal gross margin improvement from 28.7% in Q1 2022 to 28.8% in Q1 2023.

Gross margin saw a small uptick due to a sales mix with higher-margin products.

2. Strong balance sheet

I also like Sheng Siong for its strong balance sheet.

Despite the reduction in profit, Sheng Siong managed to uphold a robust balance sheet, boasting S$283.1 million in cash and zero debt.

The supermarket retailer also produced positive free cash flow of S$13.9 million during the quarter, although it experienced a 31% decline year-on-year compared to the previous year’s S$20.1 million.

Nevertheless, this is still very impressive considering the current market environment.

Given the rising interest rate environment, Sheng Siong’s strong balance sheet and free cash flow put it in a good position to capitalise on any opportunities that may arise.

3. Store expansion will drive growth

Sheng Siong’s growth strategy centres on steady store expansion, and it has successfully executed this through the pandemic years.

In 2020, it only had 59 stores, but it has since grown that number to 67 by the end of 2022.

As of 31 March 2023, the supermarket operator owned and operated 68 stores, with one new store opened during Q1 2023.

The total retail area for Sheng Sion has hit a historical high of 613,100 square feet, more than 50% higher than its store footprint of 400,000 square feet a decade ago.

Sheng Siong’s management plans to continue with its expansion strategy with at least three new store openings per year.

I am excited with the opportunities ahead for Sheng Siong, especially as the Singapore government aims to ramp up public housing supply to meet strong demand and clear the backlog accumulated over the last three years.

Construction of HDB flats is also likely to resume its normal schedule.

According to National Development Minister Desmond Lee, there will be 150 concurrent built-to-order (BTO) projects by 2025.

This year alone, HDB will launch around 23,000 BTO flats in areas such as Tengah and Jurong West.

Sheng Siong will have the opportunity to bid for new sites to open new stores and continue its expansion plan.

Its overseas expansion in China also remains intact as Sheng Siong is about to open its fifth store in Kunming, China.

4. Beneficiary of an economic slowdown

The persistent inflationary environment and potential economic slowdown are likely to drive increased sales of house brands and improve margins.

That’s as consumer preferences shift towards value offerings like those provided by Sheng Siong.

There is also a chance that Singapore may enter into a technical recession this year, further impacting consumers’ spending power.

Defensive stock against rising risk of a recession

Sheng Siong will be a defensive play for investors amid the rising risk of recession.

I highlighted Sheng Siong as one of our top picks in May as I believe it offers protection and resiliency to investors.

Aside from that, the long-term growth outlook for the supermarket operator remains strong.

With its strong balance sheet and resilient earnings, I believe that investors will benefit from the sustainable growth shown by the company.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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