Storytelling with Data: Sheng Siong (OV8)

Storytelling With Data

Storytelling with data is a series of articles analysing a company operating performance and the valuation of its stock. The charts are generated from ten years” worth of financial data and visualized on a dashboard developed by me. I will occasionally feature a company, give my analysis and finally value the company using the Discounted Cash Flow model and Dividend Discount Model. Do note that the analysis is on the visualized data and not a deep dive into the management’s strategy. This article will feature the supermarket chain, Sheng Siong (OV8).

Introduction

I believe I speak for everyone that it is still fresh in our memory of the time just prior to the circuit breaker measures’ enforcement that people were panic purchasing food staples from supermarket resulting in empty shelves once displaying eggs, flour, rice and noodles. Furthermore, to my amusement, was that people irrationally bulk buying toilet rolls and kitchen towels. As we lived through the circuit breaker period, it was evident that supermarket’s business continued to boom as people started using the surplus time on their hand to experiment with food recipes. Additionally, the more time spent at home means more demand for home inventory like soap, floor cleaners, and yes…… toilet rolls. The opportunist in me thought it was time to invest in supermarket. However, there is only one pure-play supermarket stocks in Singapore. Here a deep dive into the company’s financial performance.

Income statement

Sheng Siong had been experiencing stellar growth in revenue since its IPO in 2011 due to its rapid expansion across the country. So far, the company is not plagued by the problem some rapidly expanding companies are facing: growing inefficiency. As the revenue grows rapidly, the gross margin of the company continues to increase and that the operating margin maintains at 7-9% indicating strong revenue retention as net income.

For every year over the past 10 years, the company had delivered a solid Return of Equity (ROE) of over 20%. Sheng Siong’s ability to turn its already high fraction of equity into cash while growing aggressively reflects very strong cash management and direction from the c-suite.

Balance Sheet

Sheng Siong has a very healthy balance sheet of 59% in equity and just 6% in non-current liability. At the current debt level, the company is only spending 2% of gross income on interest payment. Sheng Siong has a very high cash reserve of about 14% of its total asset.

However, Sheng Siong’s current ratio dipped below 1 for the first time in at least 5 years. Nevertheless, given the current ratio still being close to 1 and the fast turnover over the business, I believe this is not a big concern and that it is even a momentarily one.

Cash Flows

The operating cash flow of the supermarket grows at a faster pace than net income, further enforcing the strong business performance of the company. However, the dividend payout is inconsistent and the payout ratio were constantly above 60%.

Valuation

My model assumes an expected average market return of 10% and the conservative risk free interest rate of 2%.

For discounted cash flow model, my model projects the next 10 years’ operating cash flow growth using the average growth rate from the last 3 years (15%). The present value of the stock using this formula is $1.64

For dividend discount model, my model used the lowest dividend growth rate, for conservative reasons, from the last 3 years (0%). The present value of the stock using this formula is $0.83

Conclusion

Sheng Siong is a solid company with stellar past performance and I believe it still has a lot of room to grow. While the company has strong financial performance, its stock should not be viewed as a dividend stock until the dividend growth has stabilized and that the company is paying dividend at a more sustainable pace. Nevertheless, with the stock price of $1.55 at the time of writing this article, there is not much margin of safety from the DCF valuation. One should purchase the stock with caution with the limited upside potential.

 

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