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Sheng Siong: A good investment for income?

Sunday, February 26, 2012

Last year in August, Sheng Siong's IPO created a bit of a buzz. The company promised a pay out ratio of 90% in FY 2011 and FY 2012 to woo investors and offered shares to the public at 33c a piece. It was 1.3x oversubscribed.

For FY2011, net profit fell 36.1% while revenue fell 8%. Net profit margin declined to 4.7% in FY2011 from 6.8% in FY2010. This is although gross profit margin improved somewhat to 22.1% compared to 21.8% in the previous year. Frankly, I find its net profit margin to be rather unattractive and it actually looks worse than some local construction companies'.

However, delivering on its promise of a 90% pay out ratio, the company has proposed a dividend of 1.77c per share for FY2011. At its last traded price of 48c a share, it translates to a dividend yield of about 3.69%. For those who got their shares at IPO, they would have a dividend yield of 5.36% on cost.

Many invested in Sheng Siong thinking of its business as recession proof and that it is a defensive stock to own. However, its numbers suggest that it does not have much of an economic moat and is not really defensive per se. In fact, the leaner margins have been attributed to keen competition from rival supermarket chains.

Debt free and with more cash on hand, let us see if the company would be able to deliver more value to shareholders in the new financial year. However, for any would be investor, it pays to note that after FY2012, there is no guarantee that Sheng Siong would continue with its 90% pay out ratio.

If the payout ratio were to be reduced to 50% or even 30%, what would the dividend per share amount to then? Would its earnings per share grow fast enough to compensate for the lower pay out ratio in order to continue delivering a similar quantum of dividend per share?

Sheng Siong might be a good place for grocery shopping but is it a good investment for income?

The jury is still out on this one.

See slides presentation: here.
See results announcement: here.


Ray said...

IMHO, I dont see Sheng Siong having economic moats. The competition is very stiff and Singapore's land isn't that big so every corner you turn, you'll find a NTUC, Shop N Save that will rival SS.

Also, 2 consecutive FY of 3-5% div yield isn't really that attractive when you can do better with SPH, Singpost at the current price.

AK71 said...

Hi Ray,

Yes, I agree. It seems that people who invested in Sheng Siong with the idea that it is defensive would need to do a rethink as to whether it would be able to provide them with the returns they want in the longer term.

Yihhtan said...

To add to Ray comment. I think they can't increase the rental of the wet marktet as and when they want.

Remember what happen to the not so recent incident when they try to increase rental for wet market.

INVS 2.0 said...

Hi Ak71,

Sheng Siong is thinking the way as Facebook... I wonder how come they were so confident of their businesses when IPO? Facebook is not even a brick-and-mortar business. -_-"

AK71 said...

Hi INVS 2.0,

In what way is Sheng Siong thinking like Facebook? I am really quite lost when it comes to social media and their businesses.

Well, Sheng Siong gotta be confident about their business or else who would buy their shares? Is it a case of "Old Huang selling melons; selling them himself, praising them himself"?

INVS 2.0 said...

Hi Ak71,

As in, Sheng Shiong has its own competitors and is definitely not a monopoly. Facebook, too, thinks so. But it has MySpace, Twitter and other microblogs to complete with.

AK71 said...

Hi INVS 2.0,

So des ne. Thanks for enlightening me. :)

Ray said...

Old Huang definitely must praise his melons else no one will buy.
We as customers must then check the melons ourselves and judge if the melons are worth buying :)

Facebook, IMO is already at its peak.
The only way for them from now on is downwards.
Unless they diversify like Google into other realms.

AK71 said...

Hi Ray,

Haha.. Old Huang was probably a savvy marketing guy who knew how to create demand for his melons. ;p

Howyuan said...

90% payout with 4% yield, rather go for REITs. Even blue chip REITs are better :P

AK71 said...

Hi Howyuan,

Yup, pretty unattractive and I wonder if it might lose its allure amongst the general investing crowd in time.

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