The top-line growth in 3Q24 was driven by new store openings, which contributed 3.2% rise in revenue, and improved same-store sales, which contributed around 1.5%. As a result, EBIT increased by 15.8% YoY to S$45.7mn, with a margin of 12.6%, up 120bps YoY.

Founded in 1985 and headquartered in Singapore, Sheng Siong is one of the largest supermarket chains in the country. It has been listed in Singapore Exchange since 2011. The company provides a wide range of fresh produce, including fruits, vegetables, seafood, and meat, as well as household and general merchandise, such as cleaning and personal care products. Sheng Siong offers 1,650 products under its 24 house brands and primarily operates in the Singapore market, which accounted for 97% of its 3Q24 revenue. Further, the Company has ventured into Mainland China, which accounts for 3% of its revenue. As of 3Q24, Sheng Siong operates 79 stores, including 73 in Singapore and 6 in China. Moreover, the company plans to open 4-5 additional stores in the near future.

Resilience outshines a soft market

Sheng Siong operates within Singapore’s highly competitive supermarket and hypermarket sector, which has experienced modest growth in recent years. In the first nine months of 2024, the retail sales index grew 1.6% YoY, with the supermarket and hypermarket segment recording a growth of 1.7%, according to the Singapore Department of Statistics. The increase in the cost of living over the past few years has negatively impacted consumer purchasing power, leading to a shift towards value-driven grocery shopping.

Despite these industry challenges, Sheng Siong has demonstrated resilience and growth, with a 4% YoY revenue growth in the first nine months of 2024, amounting to S$1.1bn. This growth was driven by new store openings, which contributed 2.1% rise in revenue, and improved same-store sales, which contributed around 1.8%. Gross margins improved to 30.5% in 9M24, an expansion of 60bps YoY, due to continual improvements in the sales mix and effective management of rising business costs. Going forward, the company expects retail sales to benefit from the reduction in US interest rates, which would lower domestic mortgage costs and bolster consumer spending.

Cash surges on robust performance

During the five-year period between FY19 and FY23, Sheng Siong demonstrated a solid financial performance, driven by its effective business strategies and operational efficiencies. Revenue rose from S$991mn in 2019 to S$1.4bn in 2023, at a CAGR of 9%, supported by consistent demand for its grocery products and successful expansion into new markets. Consequently, profitability increased at higher rate, with EBIT reaching S$150mn in 2023, up from $92.6mn in 2019, leading to an expansion in margin by around 160bps to reach 11.0%. Net profit also rose to S$134mn, with a margin of 9.8%, due to effective cost management, economies of scale and the focus on high-margin products. Better profitability led to FCF increasing from S$49.7mn to S$135mn over the same period. Accordingly, the company maintained a strong net cash position of S$226mn in 2023, increasing from S$27.5mn in 2019, allowing the company to maintain a healthy leverage ratio of approximately 0.2x.

Sheng Siong’s performance stands out compared to its peers. The company’s 5-year revenue CAGR far exceeds Tesco’s 1.3% and DFI Retail’s -4.8%, reflecting its robust store expansion and market positioning. Additionally, Sheng Siong’s EBIT and net profit margins were superior compared to its peers, with Tesco at 4.1% and 1.7%, and DFI at 1.8% and 0.4%, respectively. Furthermore, the company’s leverage ratio is much lower compared to Tesco’s 1.27x and DFI’s 3.81x. In addition, Sheng Siong’s higher dividend payout ratio of around 70%, with an estimated dividend yield of 4.0% for 2024, which is slightly higher than its peers Tesco’s 3.6% and DFI’s 3.9% making it much more attractive.

Superior valuation relative to peers

Sheng Siong is currently trading at a P/E ratio of 17x, based on the projected EPS of S$0.10 for FY25, which is below its 10-year historical average of 20x. However, Sheng Siong is trading at a premium to its peers, Tesco at 14x and DFI at 15x. The company’s EV/EBIT stands at 13x, which is also lower than its 10-year historical average of 16x, yet higher than Tesco at 11x and DFI at 11x. The premium valuation of Sheng Siong reflects superior margins projections and growth over its peers.

Analyst expects Sheng Siong to achieve an EBIT margin of 11.4-11.7% over the next three years, while its peers’ EBIT margins are projected to stay around 3.5-4.5%. The favourable profitability trajectory of Sheng Siong is attributed to its ability to procure products at competitive prices and expand its gross margin through a refined sales mix that emphasizes high-margin products. Out of the six analysts covering the stock, four have given a “Buy” rating, while the remaining two have an “outperform” rating, with an average target price of S$1.85, reflecting an upside potential of 13% from current market price.

Overall, the company presents a robust business model comprising of steady growth potential and above-average industry margins, whilst paying a dividend yield on par with its peers. However, economic downturns can influence consumer spending patterns, potentially leading to reduced sales for retailers and disruptions in the supply chain such as delays or shortages would adversely affect product availability and sales.