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Sheng Siong: Will The Lure Of Handsome Dividend Payout Continue?

Contributed by Shares Investment

By Jade Lee

The rush to defensive stocks amid volatility is alluring. Notably, the spotlight has been stolen by the listing of defensive-play hot stock, Sheng Siong amid a bearish market outlook. The share astonishingly jumped 69.7% to an intraday high of $0.56 on 31 August from an initial public offer price of $0.33, further strengthening investors’ belief on Sheng Siong’s strong local branding as well as its recession-proof business.

However, the market darling lately started to head south with a 11% fall to $0.50 on 1 September, extending to a total loss of 20% to $0.45 on 6 September. While investors’ confidence have now been shaken by falling share price, a few issues have been flagged up on Sheng Siong’s future growth prospect.

Competitive Retail Industry

The number of Singapore’s supermarket has grown 40% in the last five years, rising from 186 outlets in 2005 to 255 in 2010. In tandem with this supermarket boom, Sheng Siong also reported the highest revenue CAGR (compound annual growth rate) among the top three grocery retail chains at 13.1%, as opposed to FairPrice’s 8.9% and Dairy Farm’s 5.3% from 2006 to 2010.

Following the boom period, market observers are of view that the industry had grown to be a relatively competitive one with multiple core dominant players, where organic growth is likely to be slow for its operators. Particularly, Singapore’s supermarkets and hypermarkets are expected to experience approximately 4-5% growth in revenues between 2011 and 2012, and a slower rate of 1.5-2.5% growth during 2014 and 2015. Furthermore, based on revenue in 2010, Sheng Siong only held a 2.6% market share in the Singapore retail industry, putting it in third place after NTUC FairPrice Co-operative’s 7.6% and Dairy Farm International’s 7.4%, citing a study by research firm Frost & Sullivan.

Apart having a smaller market share in comparison with its key competitors, Sheng Siong’s business also relies on a small number of key stores. Specifically, of a total of 23 stores across Singapore, only 6 of the stores (including Ten Mile Junction Supermarket and Tanjong Katong Supermarket which was closed in November 2010 and closing in September 2011 respectively) contributed between 5-10% each to Sheng Siong’s revenue for 2010.

More Challenges Ahead?

Earlier, Sheng Siong announced that the completion of its 543,090 square feet warehouse at Mandai Link would enable the firm to further improve its operational efficiency. Although Sheng Siong has yet to specify any plans to expand overseas, the potential for sustained growth at home is challenging given a concentrated domestic grocery retail market that Sheng Siong operates in.

As put by SIAS Research, a bulk of Sheng Shiong’s IPO proceeds is used to repay loans as well as to build up its warehouse facilities, which actually helps in terms of cost management, but not so much of the topline strategy.

In addition, Sheng Siong has highlighted that it may incur higher operating expenses, taking examples of the rental increases and failure to procure renewals of existing or new leases, which may in turn cause a possible fall in its bottomline. DBS Vickers noted that with a current yield of 5.8% (based on 90% of FY10 earnings and price of $0.55), REITs and telcos could provide alternate choices for investors.

Of all, Sheng Siong’s plan to distribute 90% of its net profit for 2011 and 2012 is definitely a safety bet. Nonetheless, a stock in dividend play against uncertain long-term sustainable growth prompts a question – Is this what you are looking for right now?