Sheng Siong Group is a buy according to RHB’s analysis. One of the signs to see if a company is fair to its shareholders is to look at its management’s compensation. We don’t like what we see. Actually we like Sheng Siong initially (stable business, predictable cash flow etc.) until we look at the annual report in details. There are 4 executive directors who earn on average $S2.2 million in total compensation for each person as shown in their 2014 annual report. For year 2014, Sheng Shiong’s profit is $47.6 million. The 4 executive directors’ compensation is close to 20% of the profits. That doesn’t sound too right to us. For comparison, let’s look at Singtel CEO’s pay of $5.6million, which is nearly 2.5x of $2.2 million but Singtel’s profit is close to $4 billion which is roughly 80x more than what Sheng Siong is earning. This doesn’t quite add up.
Based on this simple comparison, we got a feeling that they are reaping the retail small investors and are not shareholder friendly. They are the majority shareholders and the company is a family business with many family members as key management. How can we be sure that they will be fair to the commoners and not maximize profit for themselves instead of the shareholders?
Target 25x P/E implies an earning yield of 4%. Theoretically, the shareholder will be earning only 4% on their investment which is the same as the CPF SA which is RISK FREE. We think it is very optimistic that the price will rise to the target price unless the new investor who is going to buy at this price feel that this company is risk free.
We had our reservation. What about you?
The Valumetrics Team
Sheng Siong Group – Safe Is Good
- Sheng Siong remains a Top Pick for the consumer sector and we expect its business to remain resilient despite the macroeconomic headwinds.
- Maintain BUY with DCF-based SGD1.05 TP (from SGD1.10, 27% upside), after minor tweaks to earnings estimates.
- We believe the stock is to remain a safe haven, given the strong majority shareholding, defensive business and healthy dividends.
Recession-Proof Business.
- We believe Sheng Siong has a resilient business, which would thrive during recessions.
- In our recent trip to various supermarkets in Singapore, we noticed that there may be some trading down by higher-segment consumers, ie expatriates to NTUC FairPrice from Cold Storage and working professionals to Sheng Siong from NTUC FairPrice. This is common during poor economic conditions.
Consumers Trading Down.
- On an overall price basket basis, we believe that Sheng Siong is the most competitive in Singapore, about 2-3% lower than NTUC FairPrice. It is also well-perceived for providing value to consumers.
- The company is able to maintain healthy margins by:
- being operationally cost efficient,
- undertaking bulk purchase using its central warehouse, and
- directly sourcing for its fresh food offerings.
Upside For New Stores This Year.
- We believe the rental environment is currently conducive to Sheng Siong, given the weak consumer demand.
- Management is optimistic about securing new stores in 2016, given the bumper crop of 61,000 new Housing and Development Board (HDB) flats to be completed over 2H15-2017.
- Given the long-term nature of HDB estate leases, this could potentially help the company secure a next leg of growth.
Expecting Strong 4Q15 Results, Maintain BUY.
- After fine-tuning our FY15F earnings estimates by 1%, our TP is tweaked to SGD1.05 (vs SGD1.10), implying 25x P/E.
- We expect Sheng Siong to announce strong 4Q15 results at end-February, with YoY net profit growth of 21% to SGD14.2m.
- We also expect final dividend of 1.75 cents/share, bringing full-year dividend to 3.5 cents/share.
- Given the strong cash flow and net cash position, we expect Sheng Siong to be able to maintain a 90% payout ratio in FY16.
- The key risk to our forecasts would be unsuccessful expansion of new stores.
Valumetrics.co 
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