World Class Singapore Supermarket
This third largest supermarket chain in Singapore, Sheng Siong Group Limited ($SSG:SP), has 35 outlets and steady EPS growth. This mid-cap stock has strong profitability, low volatility, no debt and good price momentum, though this combination does not come cheap. I like the steady, defensive nature of its business and its slow rise in net profit margin over the past two years. My rank of “profitable growth” shows that the company is “World Class” when compared to 310 companies in the Consumer Staples sector in Asia.
Singapore’s Third Largest Supermarket Chain
Sheng Siong Group Limited (Market cap US $875M), is the third-largest supermarket chain in Singapore. It provides low cost essential products to mass-market consumers through its no-frills approach. SSG had 35 outlets as of March in Singapore’s heartlands. The company derives all of its revenue from supermarket operations.
What I Like About It
SSG’s share price is less volatile relative to firms across the region. It has low debt levels and good price momentum relative to Singapore firms.
It is the third-largest supermarket operator with a 15% market share and should take bigger bites of the pie with its plans to enter new regions of the city state. SSG distributes up to 90% of net profits as dividends and it has stressed that it will keep up with this payout ratio for the next two years. The stock trades at an expensive 2015 4.8x PB based on consensus estimates, but that makes sense given its well-above-sector ROE, solid net-cash position and attractive dividend yield of 4%. The main risks are competition heating up and leading to store closures, and that costlier labor could weigh on margins.
What’s Going On There?
SSG uses a defensive business strategy that caters to the mass-market segment with stores located in residential areas. It provides shopping options from fresh and chilled produce (such as seafood, meat and vegetables), to packaged, processed, frozen and preserved food items. It also sells general merchandise, including toiletries and essential household items. SSG developed a selection of house brands to offer customers quality alternatives to national or international brands at substantial savings. It also offers more than 400 items under its 10 house brands. The company has an extensive distribution network, food-processing facilities, and warehouses. It has HACCP certification for processing and repackaging of fish, seafood, meat, vegetables, dried food, frozen food and fruits, from the receipt of raw materials, to storage, processing, packing and transport of finished products. Delivery services are available to selected North and Northeast districts through its e-commerce platform, allforyou.sg.
Leadership and Ownership
The company is run by three brothers: Chairman Hock Eng Lim looks after strategy and new-store expansion; Chief Executive Hock Chee Lim focuses on operations and new growth opportunities; and Managing Director Hock Leng Lim centers his activity on satisfying consumer preferences. The company has eight directors, three of whom are independent. This means that independent directors account for 38% of total directors, which is slightly lower than Singapore’s average of 46%, but higher than Asia’s average of 35%. The board met four times in 2014, and none of the members ever missed a single meeting. Institutional ownership is about five percent of total shares, which is much lower than the Singapore or Asia average.
Four Elements: FVMR
When compared to 3,660 non-financial companies in Asia, SSG is rated the best on fundamentals, with a 25% ROE and a 16% ROA. As is often the case, a strong business does not come cheap, and its valuation is relatively expensive at 24x PE and 5x PB. However, I like the company’s momentum in earnings and its expanding margin. Finally, risk is relatively low, as the company is net cash.
Profitable Growth: World Class
My rank of “profitable growth” shows that the company is “World Class” when compared to 310 companies in the Consumer Staples sector in Asia, reaching the top decile in my combination of ROA and EPS Growth, or what I call “Profitable Growth”.
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