Sheng Siong Group

[dzwm87]

This is where I figured out ROU understanding (including the portion of lease/interest which was confusing to me for a long time): https://www.youtube.com/watch?v=F4tR1s0ojD0

It basically works like a mortgage amortisation schedule. In the old lease accounting, rental is a straight line amortisation. Under IFRS16, it is front-loaded which means that for F&B business where rental terms is 3 years, the swing will be more meaningful. There was an old Breadtalk presentation slide which illustrated this comparison very well.

IFRS16 was introduced because there were a lot of off balance sheet lease arrangements adopted, mainly by the western companies. You can think of it as sales and leaseback on steroids in order to juice their ROE. Hence IFRS16 attempts to quantify the full on balance sheet impact. The trade off is that net cash companies with high lease exposure, especially F&B businesses, end up with a large amount of lease liabilities. People unaware of the intention will then think these companies are highly leveraged and incurring "interest" payments.

I don't include lease liabilities in my enterprise value calculation because these are not actual interest-bearing debt obligation. It is contractual binding but same nature as employee contracts. Terminating it comes with penalties (e.g. severance payments) but we don't PV all employees contracts and add it into EV.

[weijian]

IFRS16 was introduced because there were a lot of off balance sheet lease arrangements adopted, mainly by the western companies. You can think of it as sales and leaseback on steroids in order to juice their ROE. Hence IFRS16 attempts to quantify the full on balance sheet impact. The trade off is that net cash companies with high lease exposure, especially F&B businesses, end up with a large amount of lease liabilities. People unaware of the intention will then think these companies are highly leveraged and incurring "interest" payments.

I don't include lease liabilities in my enterprise value calculation because these are not actual interest-bearing debt obligation. It is contractual binding but same nature as employee contracts. Terminating it comes with penalties (e.g. severance payments) but we don't PV all employees contracts and add it into EV.

hi dzwm87,

Would you actually mean "juice their ROA" instead? In the sales/leaseback, equity doesn't change but the asset will increase due to the ROU.

One of the main problems with IFRS16 is that we might overestimate the OCF since these lease payments (or rental expenses) are shifted to the financing portion side in the CF statement.

Normally when we use EV, it is akin to taking over the entire business on a on-going basis and so it make sense not to include lease liabilities because one still expects the business to continue operations. But let's say if we decide to value certain companies based on liquidation value, then it probably make sense to account for them (ie. write off the ROU asset to zero and account for the ROU liability in full).

[dzwm87]

Yes ROA being asset-light 

And yes, one have to adjust headline operating cashflow too.

[Choon]

hi Choon,

Just sharing my non-accountant understanding (and would appreciate account-trained VBs to chip in/correct me):

(1) ROU asset/liabilities are generally matched, meaning their equity value is roughly zero. So yes, they did not "invest a large sum to acquire it". But this does not include building/improvement costs (where the latter is classified under PPE). For example, the Lims have mentioned that every leased space takes ~1mil to renovate before it can start ops.

This is where I figured out ROU understanding (including the portion of lease/interest which was confusing to me for a long time): https://www.youtube.com/watch?v=F4tR1s0ojD0

(2) Pg90 shows that 6 Mandai Link is under 4(a) and not 4(b). So 6 Mandai Link is classified under PPE. My personal notes didn't record much information on it but SSG spent 17mil to own a couple of leasehold units below (pg11 of AR21) and they should be quite self explanatory:

In October 2021, the Group completed the acquisition of a  commercial premise situated at 1 Jalan Berseh #B1-02 to #B1 22 New World Centre S209037, with floor area of approximately 19,267 sq. ft for a consideration of S$17.25 million.

--------------------------------

In summary, I think we could imagine ourself deciding between whether to rent OR purchase a strata lot at Shine@TuasSouth (21years lease remaining) from HockLianSeng:

(A) If we decide to rent it for a year at 3k/month --> we record 36k each of ROU asset and ROU liability.
(B) If we decide to buy it from Chairman Chua at 1mil --> we record 1mil as PPE and then depreciate this 1mil over 21years.

Thanks Weijian.

There is a footnote on pg90 which states that the leasehold land and properties of 6 Mandai Link are classified as ROU assets.

My guess is that: 

• SS is leasing the land of 6 Mandai Link from JTC and pays a rent on the land annually. The rent over the next 10/20/30 years is capitalised as ROU asset/liability.
  

• The warehouse that SS built on the land of 6 Mandai Link, that was a one-time capex.  
  

https://sbr.com.sg/retail/news/sheng-sio...-warehouse

[dreamybear]

......

A beneficary of Singapore immigration policy which has been brining in a percentage of low wage workers, Sheng Siong positions itself on the low-price spectrum on supermarket branding, thus avoiding Fairprice Finest or Jason (part of Dairy Farm Group). As a demand derived business, with each growth in population, a higher level of demand results for Sheng Siong's supermarket.

In addition, like most supermarkets, the cash conversion cycle of Sheng Siong is low (it has a negative cash conversion cycle). This shows the business model does not need a lot of money to operate and Sheng Siong itself is lowly geared with virtually no debt. Hence it has a 70% payout ratio which is sustainable.

......

SG's population rises to historical high; SS able to scoop up properties to grow its business with its strong cash generation. Prospects still looking good. 

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Singapore’s population rises to historic high of 6.04 million, mainly due to growth in non-resident population
https://www.channelnewsasia.com/singapor...se-4627281

Sheng Siong scoops up DFI’s last two Singapore properties
https://www.businesstimes.com.sg/compani...properties
"The proposed acquisition will be financed with Sheng Siong’s internally generated funds, the group said on Friday. The move will allow the group to open additional stores, receive extra rental income from the leaseback agreement, and gain long-term capital appreciation from the assets, it added."

[weijian]

I will put DFI's sale of its Spore grocery business to the same buyer who bought over the Msian ops in the SSG thread.

SSG's Lims once talked about entering the tough Msian grocery market but wisely didn't. Instead, now the folks across the Straits are coming. If we looked at what Macrovalue did to DFI's Msian ops since taking over in 2023, we could probably expect some changes coming that will be posing challenges to SSG.

Malaysia’s Macrovalue is buying Cold Storage and Giant: Who are its owners and what’s the game plan?

DFI will sell all 48 Cold Storage and 41 Giant outlets, as well as two distribution centres to Macrovalue for S$125 million. Scott Price, group chief executive of DFI Retail Group, said that Macrovalue is “ideally positioned” to drive the next phase of growth for the Singapore food business – due to its expanded scale and procurement power across Malaysia and Singapore. “(It is) uniquely equipped to unlock these efficiencies and deliver greater value to customers – achieving outcomes that would have been more challenging to accomplish for retailers with a presence only in Singapore,” he said in the Mar 24 statement.

In 2023, Macrovalue acquired Malaysia-based GCH Retail Group, the operator of Cold Storage, Giant and Mercato in the country.

After taking over Giant in Malaysia, Macrovalue refreshed the concept to offer a different product mix and better price points, repositioning the hypermarket concept as Giant Malls, according to an article by The Edge Malaysia. It had pledged to initiate changes at the stores to improve profit margins and revenue per square foot.

https://www.businesstimes.com.sg/compani...-game-plan

P.S. DFI CEO Scott Price said it is challenging for retailers with a presence only in Singapore. But don't their local competitors FairPrice and Sheng Siong also have a presence only in Singapore?

[LionFlyer]

P.S. DFI CEO Scott Price said it is challenging for retailers with a presence only in Singapore. But don't their local competitors FairPrice and Sheng Siong also have a presence only in Singapore?

FairPrice unique moat is it pseudo government backing as a way to control prices of essential goods, even though it targets different segments.

SS has excellent sourcing likely via third parties / grey market to enable lower prices, but they target mass market and their locations reflects this. They also got very good/efficient at optimising space to achieve higher sales for square foot.

The challenge with CS is they mostly target the middle class and upper middle class segment. Some of their locations are expensive (e.g CS Fresh Gold at Tanglin mall).

It's funny to look back on the supermarket scene. 15 years ago, I did my thesis on this for my MBA program. That time still got Carrefour and DairyFarm/CS was still going strong. My conclusion then was a new entrant needs to find a niche (e.g Donki), else try to fight for mass market share or even middle class will end badly.