Sheng Siong Group

[AlphaQuant]

(There was a slight numerical error in my previous post, so i made some corrections and reposted)

I have ShengSiong in my watchlist but have problems justifying its valuation.

At price of 60c => P/E >20 and P/S ard 1.2. This seems rich compared to other comparables.

Let's assume earnings is a function of gross floor area

Data shows:
2011 340k sqf with EPS = 1.97c
2012 400k sqf with EPS = 3c

Since the announcement of a shift of plan to purchase i/o lease, there were 2 acq plans of which Kallang was aborted subsequently.

Kallang Bahru 779sqm (ard 8.3k sqf) for 13.5mio => cost psf = $1626
Yishun 1729 sqm (ard 18.5k sqf) for 54.9mio => cost psf = $2967

so let's average it out and call it $2k psf. (this is obviously bit rubbish since locations and tenures vary)

To expand at the rate from 2011 to 2012 annually will require 60k sqf, and let's assume that 25% of this is thru purchase with the rest thru leasing (which the firm has said is tough)

That means an outlay of 0.25*60k*2k= 30mio p.a.

The latest annual profit is ard 40mio and the firm has 100mio cash.

So the analysis above is rather crude since there are so many factors to permutate, but I think there's a rough feel of what it means capital-wise by expanding thru acquisition.

[AlphaQuant]

U guys know if ntuc fair price numbers is open to public? Just wanna compare it against sheng shiong and dairy farm.

You get a decent idea from SS's IPO prospectus:

Estimated revenue of top three (3) grocery retail chains in Singapore, 2006-2010

NTUC Fairprice Co-operative Pte Ltd
1,323.7 1,430.0 1,576.3 1,748.1 1,859.1 CAGR 8.86%
Dairy Farm International Holdings Ltd
1,473.1 1,519.4 1,576.3 1,702.1 1,810.2 CAGR 5.29%
Sheng Siong Group Ltd.
384.3 549.3 610.2 625.3 628.4 CAGR 13.08%

[CY09]

Just curious SS produces about +45M in OCF. Lets assume it produces the same amount next year and spends 40M (30M for the extra space acquisition and 10M for other PPE). Wont it comfortably be able to draw down 35M from its 100M cash pile to continue its current dividend?

I believe 65M for working capital is adequately sufficient for SS, considering its cash collection days is close to zero (could be even negative).

< judging from a cash flow analysis>

However, what I doubt is whether increase in store space will necessarily lead to increase in EPS. This is because many of SS prices are roughly similar to Fairprice (like alcohol and snacks) and SS reputation to be able to offer low prices vis-à-vis Dairy Farm's G value or NTUC fairprice is diminishing as a result

[AlphaQuant]

Just curious SS produces about +45M in OCF. Lets assume it produces the same amount next year and spends 40M (30M for the extra space acquisition and 10M for other PPE). Wont it comfortably be able to draw down 35M from its 100M cash pile to continue its current dividend?

that's the tough part abt all these guestimations since there are so many moving parts, including the assumption of the relationship between GFA and earnings.

In the situation I painted above, the OCF is sufficient.

However, that is a situation where the GFA expansion is funded thru 25% acquisition and 75% leases, so if you go to a 50//50 and above, the math works out differently.

In the latest earnings report, they stated "There were not many new supermarket outlets serving the mass market opened by the competitors in 2013 and the focus of industry could be improving same store sales in 2014", as well "The Group did not find suitable retail space to open outlets in FY2013", so i think it's up to your imagination to figure out what your most-likely scenario will be, churn the pricing and find your valuation.

[CityFarmer]

Well, guru has different opinion, time to review my numbers.

I noticed that there are two major differences between our workings.
- Your revenue growth is solely derived from retail GFA growth. On top of retail GFA, higher same-store growth, and contribution from virtual store i.e. online stores are also considered in my workings.
- In your working, acquisitions are solely funded by cash reserve, but I did assume cash and debt funding. Property investment without leverage doesn't seem a good idea to me.

Let's touch on the common point. I do agree dividend payout might not sustain. During two years post-IPO, the dividend payout seems partially support by cash research. Dividend payout was 38 mil (2012), and 41 mil (2013), while the OCF was 34 mil (2012) and 45 mil (2013), excluding the maintenance CAPEX, which can be more than 5 mil each year. But I am more concern on cash flow, than dividend growth.

Next point on same store growth. There are few ways to increase it, one is 24 hours operation, and other one is better product mix with higher margin products. FYI, there are 28 stores, out of 33 stores, are operating 24 hours in SS. Most of them started in FY13, with the latest three started Oct 2013. It takes time for them to reach full cap.

Ref: http://www.shengsiong.com.sg/pages/Media-Center.html

Better product mix is another way. Same for the newly started online store. I was skeptical on online store of SS, till I started using NTUC online store. I found it might work for SS. I would like to refer to Mar 3 version of The Edge. There was a write-up on Redmart, and stated the popularity of online purchase, if done right. I really don't see the reason why SS can not compete with Redmart. Let's give SS time to get it right. SS has all the resources to scale up as fast as demanded, IMO.

Let's come back on the property venture. I will take it as separate business segment of SS. The funding of the venture is either by internal fund or debt. Let me take your number as reference. A 20% growth of GFA, means 60K sq ft, will need capital of 30 mil (assume 2k per sq ft, which is on low side, IMO). A LTV of 60% means cash outlay of 12 mil. So the 100 mil cash reserve is able to support more years, after factoring in the rental cash flow from the properties acquired.

I hope the numbers are right. Feel free to highlight if any.

(vested)

(There was a slight numerical error in my previous post, so i made some corrections and reposted)

I have ShengSiong in my watchlist but have problems justifying its valuation.

At price of 60c => P/E >20 and P/S ard 1.2. This seems rich compared to other comparables.

Let's assume earnings is a function of gross floor area

Data shows:
2011 340k sqf with EPS = 1.97c
2012 400k sqf with EPS = 3c

Since the announcement of a shift of plan to purchase i/o lease, there were 2 acq plans of which Kallang was aborted subsequently.

Kallang Bahru 779sqm (ard 8.3k sqf) for 13.5mio => cost psf = $1626
Yishun 1729 sqm (ard 18.5k sqf) for 54.9mio => cost psf = $2967

so let's average it out and call it $2k psf. (this is obviously bit rubbish since locations and tenures vary)

To expand at the rate from 2011 to 2012 annually will require 60k sqf, and let's assume that 25% of this is thru purchase with the rest thru leasing (which the firm has said is tough)

That means an outlay of 0.25*60k*2k= 30mio p.a.

The latest annual profit is ard 40mio and the firm has 100mio cash.

So the analysis above is rather crude since there are so many factors to permutate, but I think there's a rough feel of what it means capital-wise by expanding thru acquisition.

My take:
1) while the firm has 100mio of cash now and can readily deploy it for acquisition for 1-2 years, a dividend cut looks likely.

2) The attraction of ShengSiong is the cash generation ability and a more aggressive expansion mode will likely result in -ve FCF or increased borrowings, which is somewhat contradictory to the investment thesis.

[thefarside]

Let's come back on the property venture. I will take it as separate business segment of SS. The funding of the venture is either by internal fund or debt. Let me take your number as reference. A 20% growth of GFA, means 60K sq ft, will need capital of 30 mil (assume 2k per sq ft, which is on high side, IMO). A LTV of 60% means cash outlay of 12 mil. So the 100 mil cash reserve is able to support more years, after factoring in the rental cash flow from the properties acquired.

Sheng Siong intends to use those properties acquired for its supermarket operations. So you would not have "rental cash flow" per-se, but the new stores acquired on these basis would see greater cash generation net costs which now excludes the rental component. If the property can be justified on the rental, then the venture is in a way self-funding with a supermarket ops on top of the property - a bit of a call option on the future value of the underlying property itself.

However this will come at the cost of a higher asset base and ROE / ROA will show a decline over time if they roll out significant number of stores based on this approach. There will be revenue and earnings expansion, but the market may read the decline in ROE / ROA and devalue the multiple accordingly.

This does give them better control over the fate of the stores and the margins from the business, of which rental is now a large component.

[safetyfirst]

... By a simple survey, you will find people are visiting SS, even it means longer walking distance, and/or extra bus trip. It is undeniable that the SS show plays an important role on the "desire".

Interestingly, i did this survey with my mum, aunt and grandma. They say they wont specially visit sheng shiong so i guess the ss outlet near my place is just average.

That is one interesting input. Where do your mum, aunt and grandma do the shopping? Wet market, NTUC or Cold Storage/Giants?

They will visit all that you mentioned but they do not show any special preference for any of them.

Due to the nature of my job, sometimes in my free time, i will also visit ntuc, cold storage, giant, shengshiong to kill time. i do find ss neater though but i am not too sure if that factor alone is enough to ward off competition.

I do agree that you may have observed other area that i dont see, perhaps can share some of these for discussion...

[CityFarmer]

... By a simple survey, you will find people are visiting SS, even it means longer walking distance, and/or extra bus trip. It is undeniable that the SS show plays an important role on the "desire".

Interestingly, i did this survey with my mum, aunt and grandma. They say they wont specially visit sheng shiong so i guess the ss outlet near my place is just average.

That is one interesting input. Where do your mum, aunt and grandma do the shopping? Wet market, NTUC or Cold Storage/Giants?

They will visit all that you mentioned but they do not show any special preference for any of them.

Due to the nature of my job, sometimes in my free time, i will also visit ntuc, cold storage, giant, shengshiong to kill time. i do find ss neater though but i am not too sure if that factor alone is enough to ward off competition.

I do agree that you may have observed other area that i dont see, perhaps can share some of these for discussion...

Thanks for sharing. Let me share the following, base on months-long of talking to people and observations.

- Those regular shoppers in ColdStorage seemed have lesser interest on SS. I have a strong feel that SS and ColdStorage are having lesser common customer groups.
- Those regular shoppers in NTUC/Wet Market seemed have more interest on SS. So I took NTUC as a key SS competitor.
- I found people are going to SS, even after the regular shopping in NTUC. So may be SS supplies products/services which NTUC doesn't.

This is part of my "scuttlebutt" result, which have no backing of statistic/facts. So it might highly inaccurate and totally wrong.

(vested)

[CY09]

Hi,

There is indeed a segmentation of supermarket patrons. In fact they are quite prevalent and observable.

For the mass market: NTUC Fairprice vs Sheng Siong vs Giant/Giant Express ( belongs to the Dairy Farm Group).

For the high end: NTUC finest vs Cold Storage (Dairy Farm)

For the higher end, there is Jason's (Dairy Farm).

As you can see Sheng Shiong competes in the mass market segment. Also, one thing interesting to note is during CNY, SS sells "roasted pork" and other pork products in the kilograms. I heard it is especially popular as this could be stemmed to SS' origin of being pork sellers and thus "believed" quality can be obtained for such products. A small competitive advantage SS has over Fairprice.

[CityFarmer]

Hi,

There is indeed a segmentation of supermarket patrons. In fact they are quite prevalent and observable.

For the mass market: NTUC Fairprice vs Sheng Siong vs Giant/Giant Express ( belongs to the Dairy Farm Group).

For the high end: NTUC finest vs Cold Storage (Dairy Farm)

For the higher end, there is Jason's (Dairy Farm).

As you can see Sheng Shiong competes in the mass market segment. Also, one thing interesting to note is during CNY, SS sells "roasted pork" and other pork products in the kilograms. I heard it is especially popular as this could be stemmed to SS' origin of being pork sellers and thus "believed" quality can be obtained for such products. A small competitive advantage SS has over Fairprice.

Thanks the sharing. Interesting inputs. So my observations are in fact, common senses