1 Simple Number To Understand 3 Important Areas Of Sheng Siong Group Ltd

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore. The company’s network of 50 stores are primarily located at the heartlands of the island. The company was established in 1985 and listed in 2011.
In this article, I want to dig deep into Sheng Siong’ return on equity, or ROE.
The choice of ROE
Why ROE, some of you might be asking? That’s because this financial metric gives investors important insights on a company’s ability to generate a profit using the shareholders’ capital it has.
A ROE of 20% means that a company generates \$0.20 in profit for every dollar of shareholders’ capital invested. In general, the higher the ROE, the more profitable a company is. A high ROE can also be a sign that a company has a high quality business.
That being said, it’s worth noting that the use of high leverage – which increases the financial risk faced by a company – can also increase a company’s ROE. So, that’s something to observe.
Calculating the ROE
The ROE can be calculated using the following formula, which is the way many investors do it:
ROE = Net Profit / Shareholder’s Equity
But, the ROE can also be calculated using a different approach shown below:
ROE = Asset Turnover x Net Profit Margin x Leverage Ratio
Doing so will reveal three important aspects about a company: how well it is managing its assets, how efficient it is at turning revenue into profit, and how much financial risk it could be taking on. For more information about this formula for ROE, you can check out the articlehere.
With that, let’s turn our attention to the ROE of Sheng Siong.
The actual numbers
The asset turnover measures the efficiency of a company in using its assets to generate revenue. It is calculated by dividing a company’s total revenue by its assets.
For Sheng Siong, it had total revenue of S\$829.9 million and total assets of S\$403.6 million in its fiscal year ended 31 December 2017 (FY2017). This gives an asset turnover of 2.06.
The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses.In FY2017, Sheng Siong had a net profit margin of 8.4%, given its net profit of S\$69.5 million and revenue of S\$829.9 million.
Lastly, we have the leverage ratio, which shows the relationship of a company’s total assets to its equity. It is calculated by dividing total assets by equity.Ahigher ratio means that a company is funding its assets with more liabilities, hence resulting in higher risk.In FY2017, Sheng Siong had total assets and total equity of S\$403.6 million and S\$273.2 million respectively. This gives a leverage ratio of 1.48.
When we put all the numbers together, we arrive at an ROE of 25.4%.
\$Sheng Siong(OV8.SI)

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Sheng Siong Group Ltd’s Shares Beat The Singapore Market By 27%: Is It A Good Business?

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore, and was listed here in 2011.

At Sheng Siong’s current share price of S\$1.09 (as of the time of writing), the company’s shares are up about 17% in the last 12 months. Comparatively, the Straits Times Index (SGX: ^STI) was down by about 10% during this period. This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does Sheng Siong have a high-quality business?

This question is important. If Sheng Siong has a high quality business, its current low share price could be an investment opportunity. Unfortunately, there’s no easy answer to the question. But, a simple metric can help shed some light on the question: the return on invested capital (ROIC).

## A brief introduction to the ROIC

In a previous article of mine, I explained how the ROIC can be used to evaluate the quality of a business.

The simple idea behind the ROIC is that a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business. High-quality businesses tend to have high ROICs while the reverse is true – a low ROIC is often associated with a low-quality business.

You can see how the math works for the ROIC in the formula above.

## Sheng Siong’s ROIC

The table below shows how Sheng Siong’s ROIC looks like. I had used numbers from its fiscal year ended 31 December 2017 (FY2017).

Source: Sheng Siong’s Annual Report

In FY2017, Sheng Siong generated a ROIC of 40.5%. This means that for every dollar of capital invested in the business, Sheng Siong earned 40.5 cent in profit. The company’s ROIC of 40.5% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Sheng Siong has a high quality business.

One main reason for Sheng Siong to achieve such high ROIC is that it finances its business with trade payables. To illustrate my point, total inventories and receivables was about S\$75 million in 2017 while trade payables was \$111 million. Going forward, it will be useful to monitor whether Sheng Siong can maintain its current working capital policy as this will determine the return on invested capital in the future.

\$Sheng Siong(OV8.SI) \$STI(^STI.IN) \$Sheng Siong(OV8.SI)

Dividends Are The Gift That Keep On Giving

Christmas is over. We didn’t have chestnuts roasting on an open fire and we didn’t have Frosty the Snowman, either – it’s much too warm for that in Singapore.

But Santa Claus did come to town. And in the case of, us, dividend investors, it could almost be Christmas every day.

When it comes to income investing, it can sometimes feel like Christmas every month of the year. But the reliability of the income stream can depend on whether we have been naughty or nice, which in the case of dividend investors is whether we have been successful with our stock selections.

Since starting a column in The Business Times some 12 months ago, I have looked at a myriad of sectors. They range from pedestrian Real Estate Investment Trusts to high-flying airlines…

…. But they all have one thing in common. They have the potential to be good dividend payers, if we choose our stocks judiciously. So, how have some of those sectors done?

Reliable REITs

By and large they have performed well. Real Estate Investment Trusts, for instance, are often seen as reliable dividend payers. They could be the gift that keeps on giving because they must pay out at least 90% of their profits as distributions.

Amongst the best performerslast year were CapitaLand Mall Trust (SGX: C38U) and Mapletree Commercial Trust (SGX: N2IU). The former had delivered a total return of 12%, of which almost half had been capital gains.

Banks had been steady dividend payers in 2018, though their shares have struggled to appreciate. But that’s alright. It just means that the dividend yield, which was already attractive, could be even more alluring.

That is how income investors should look at dividend shares. We should try to work out how much we are paying for every dollar of income. One example has been DBS Group (SGX: D05). Its shares have barely moved this year. But reinvested dividends have delivered a total return of 5%.

Jetting off

Many investors love airlines shares. But it is hard to understand why. Airlines are hampered by high operational gearing. In other words, they have high overheads that need to be recovered before they can deliver a bottom-line profit.

When conditions are favourable, they might. But when there are headwinds, their performance can be disappointing. Of the two dozen or so airlines that were reviewed, only three have delivered a positive total return last year.

Hotels could have high operational gearings too. But they might also benefit from an appreciating asset, namely, the land that their hotels sit on. Amongst the best performing hotels in 2018 were The Hong Kong and Shanghai Hotels (SEHK: 0045), which owns the iconic Peninsula in Hong Kong, and Singapore-listed Mandarin Oriental (SGX: M04).

Food & drink

Brewers have demonstrated some of their defensive qualities last year, though not in every instance. However, Carlsberg Brewery Malaysia (KLSE: 2836.KL) and Heineken Malaysia (KLSE: 3255), which are listed on the Kuala Lumpur Stock Exchange, have been notable standouts.

They have delivered total returns of 35% and 9.8% this year. In the year to date, Carlsberg Brewery Malaysia has increased its dividend 417%.

Food retailers have been resilient throughout most of 2018. Perhaps it has been extreme market volatility that has prompted some investors to seek solace in food. Perhaps it could also be because food retailers are considered defensive.

Whatever the reasons, Singapore grocers that include Sheng Siong (SGX: OV8) and Dairy Farm International (SGX: D01), which owns Cold Storage, have been amongst some of the best-performing shares in in 2018.

Sheng Siong has delivered a total return of 21%, while Dairy Farm International has rewarded shareholders with a 15% return.

Think different

2018 has been a turbulent year for investors. The Straits Times Index (SGX: ^STI) had lost a couple of hundred points or more over the12 months. That can be painful.

But for income investors, the reliability of an income stream should always be more important than capital appreciation. It requires a special mindset to be an income investor. So, when stock markets are down, income investors simply see it as an opportunity to buy more dividends at a lower price.

Thing is, income investors think a little differently to others in the stock market. We know that from time to time, the value of our portfolios might fluctuate. Our shares might even drop below the price that we paid for them….

…. But provided the income stream continues to be strong, the market price of our shares should eventually take care of themselves.

Not everyone has the temperament to be a calm and considered income investor. But if you can, every day can feel like Christmas, especially when those dividend cheques hit your bank account.

But don’t forget to reinvest th0se dividends quickly. That is how you could grow your dividends effortlessly.

\$STI(^STI.IN) \$CapitaMall Trust(C38U.SI) \$DairyFarm USD(D01.SI) \$DBS(D05.SI) \$Man Oriental USD(M04.SI) \$Mapletree Com Tr(N2IU.SI) \$Sheng Siong(OV8.SI)

Which Singapore-Listed Supermarket Share Should Investors Buy Now? Part 3

There are two major listed supermarket shares in Singapore.

Dairy Farm International HoldingsLtd(SGX: D01)runs its retail business under brands such asGuardian,Cold Storage,Giant Hypermarket,and7-ElevenwhileSheng Siong Group Ltd(SGX: OV8)operates its namesake-branded stores.

Interestingly, both company shares have outperformed theStraits Times Index(SGX: ^STI)in 2018. Given the interest in the companies, investors might want to know which of the two supermarkets they should consider investing now.

In my previous articles here and here, I compared the recent earnings performance of both companies, as well as their track record of growth in the last five years. The first round was a draw between the two while Sheng Siong won the second round.

In this article, I will look at the last part of my comparison, which is on valuation. Here, I will compare the valuation metrics of the two supermarket chains. The three valuation metrics I will focus on are the price-to-book (PB) ratio, price-to-earnings (PE) ratio, and dividend yield.

## The showdown

To begin, Dairy Farm and Sheng Siong have PB ratios of 7.4 and 5.9 respectively. The lower PB ratio for Sheng Siong suggests that it is better priced than Dairy Farm.

Next, Dairy Farm and Sheng Siong have PE ratios of 29.4 and 22.6 respectively. Again, Sheng Siong appears to have the better valuation based on its lower PE ratio.

Last but not least, the respective dividend yields for Dairy Farm and Sheng Siong are 2.3% and 3.2%. The higher a stock’s yield is, the lower is its valuation. Once again, we can see that Sheng Siong has the better valuation in terms of dividend yield.

Overall, we can argue that Sheng Siong is the cheaper one among the two companies.

## The Foolish conclusion

In sum, Sheng Siong emerges as the overall winner by triumphing over Dairy Farm in two out of the three rounds. However, investors are reminded that the information presented here is by no means a recommendation to take any action on the shares mentioned. Instead, it should be viewed as a useful starting point for further research.

\$STI(^STI.IN) \$DairyFarm USD(D01.SI) \$Sheng Siong(OV8.SI)

Which Singapore-Listed Supermarket Share Should Investors Buy Now? Part 2

There are two major listed supermarket shares in Singapore.

Dairy Farm International HoldingsLtd(SGX: D01)runs its retail business under brands such asGuardian,Cold Storage,Giant Hypermarket,and7-ElevenwhileSheng Siong Group Ltd(SGX: OV8)operates its namesake-branded stores.

Interestingly, both company shares have outperformed theStraits Times Index(SGX: ^STI)in 2018. Given the interest in the companies, investors might want to know which of the two supermarkets they should consider investing now.

In my previous article here, I compared the recent earnings performance of both companies. The result was a tie between the two.

In this article, I will compare their track record of growth in the last five years. The objective is to find out which company did a better job in growing its business in the last five years.

## The showdown

Let’s begin with Dairy Farm.

From 2013 to 2017, Dairy Farm’s revenue grew from US\$10.4 billion to US\$11.3 billion. Yet, net profit attributable to shareholders fell from US\$500.9 million to US\$403.5 million. The former was up by 9% while the latter was down by 19% during the time frame.

Next, we have Sheng Siong.

During the same period, Sheng Siong’s revenue improved from S\$687.4 million in 2013 to S\$829.9 million in 2017. Similarly, net profit attributable to shareholders climbed from S\$38.9 million to S\$69.5 million. The former increased by 21% while the latter jumped by 79% during the period.

## The Foolish conclusion

In all, we can see that Sheng Siong performed better than Dairy Farm in the last five years, both in terms of revenue and net profit.

\$STI(^STI.IN) \$DairyFarm USD(D01.SI) \$Sheng Siong(OV8.SI)

Which Singapore-Listed Supermarket Share Should Investors Buy Now? Part 1

There are two major listed supermarket shares in Singapore.

Dairy Farm International HoldingsLtd(SGX: D01)runs its retail business under brands such asGuardian,Cold Storage,Giant Hypermarket,and7-ElevenwhileSheng Siong Group Ltd (SGX: OV8) operates its namesake-branded stores.

Interestingly, both company shares have outperformed the Straits Times Index (SGX: ^STI) in 2018. Given the interest in the companies, investors might want to know which of the two supermarkets they should consider investing now.

As such, I would like to put both companies up for a side-by-side comparison. To start, I will compare the earnings performance of both companies for the first half of the year. The objective is to find out which of the two did a better job.

## The showdown

Let’s begin with Dairy Farm.

For the first half this year, Dairy Farm sales grew by 8% year-on-year to US\$5.9 billion. Similarly, profit attributable to shareholders was up 6% year-on-year. Excluding non-trading activities, underlying profit attributable to shareholders rose 2% year-on-year to US\$215 million. As a result, underlying basic earnings per share was up 2% year-on-year to US\$0.1588.

Next we have Sheng Siong.

For the first six months ended 30 June 2018, Sheng Siong reported that sales grew by 5.4% from a year ago to S\$441.3 million. Similarly, gross profit was up 9.4% year-on-year to S\$117.9 million. As a result, net profit attributable to shareholders improved by 6.5% year-on-year to S\$35.4 million.

## The Foolish conclusion

In sum, both companies delivered growth in their top and bottom line. Here, Dairy Farm came ahead in terms of revenue growth while Sheng Siong did better in terms of net profit growth. The overall result is a tie for the first round.

\$STI(^STI.IN) \$DairyFarm USD(D01.SI) \$Sheng Siong(OV8.SI)