Sheng Siong is Bidding for New Shop Spaces: Can the Retailer’s Share Price Hit a New High for 2024?

It was a downbeat year for Sheng Siong (SGX: OV8) as investors adopted a wait-and-see attitude.

Shares of the supermarket operator fell by 6% in the past year amid lingering worries over inflation that may threaten consumer spending.

The retailer’s share price hit an all-time high of S$1.83 back in May last year but has declined by around 14.2% since then.

2024 should see Sheng Siong bidding for more HDB shop spaces as it targets to open at least three new stores per year.

If the group is successful, could its share price revisit the high it scaled last year?

A mixed set of financial numbers

Sheng Siong posted a commendable set of earnings for the first nine months of 2023 (9M 2023) despite the high inflation numbers.

Revenue edged up 2.6% year on year to S$1.04 billion with gross profit increasing by 4.3% year on year to S$310.1 million.

Net profit, however, dipped by 0.1% year on year to S$100.3 million on account of higher staff costs and an increase in utility expenses.

Cash flow remained strong despite the slight profit decline.

For 9M 2023, the supermarket operator generated S$125.1 million of free cash flow, 20% higher than the prior year’s S$104.2 million.

Committed to store increases

Management is committed to increasing the number of stores it has in Singapore.

As of 30 September 2023, Sheng Siong operated 69 outlets across the island serving a wide variety of products ranging from fresh and chilled produce to daily necessities such as toiletries and essential household items.

The 69 stores were a slight increase over the 67 stores at the end of 2022 with 2 new stores opened in 9M 2023.

The retailer’s retail area has also steadily increased over the years, going from 571,200 square feet at the end of 2020 to 618,300 square feet as of 30 September 2023.

The group plans to open at least three new stores per year to accelerate its expansion plan and drive higher sales.

There is ample evidence that new stores help to drive Sheng Siong’s top line.

For 9M 2023, new stores contributed a three percentage point year on year increase in sales.

This is significantly higher than the 0.2% year on year sales increase contributed by higher comparable store sales.

Hence, Sheng Siong’s strategy of opening new stores could garner the group higher sales for 2024 if it achieves this objective.

The tailwind of gross margin improvement

Meanwhile, investors can also look at another tailwind for Sheng Siong – the steady improvement of its gross profit margin.

From 2019 to 2022, the supermarket operator’s gross margin improved from 26.9% to 29.4%, with every year showing a year-on-year improvement.

Fast forward to the third quarter of 2023, and Sheng Siong’s gross margin has surpassed the 30% level to come in at 30.3%, higher than the prior year’s 29.4%.

This consistent increase in the retailer’s gross margin is attributed to a favourable sales mix where its house brand products with better margins saw higher sales.

Sheng Siong’s steady gross margin increase helps to mitigate the pressures from cost increases and is a strong tailwind for the business moving ahead.

More BTO flats to be launched

Management has been aggressive in bidding for more HDB shop spaces as it seeks to grow the group’s network of stores around Singapore.

Last year, HDB released five shops for tender with Sheng Siong bidding for all of them.

Of the five, the group was awarded one with three pending results.

Five more shop space tenders are expected in the six months after November 2023 (i.e. up till April 2024).

The healthy flow of new shop spaces underscores the efforts undertaken by HDB to bulk up its supply of flats to cater to high demand.

For context, 19,600 build-to-order (BTO) flats are slated to be launched this year with three sales exercises in February, June, and October, according to National Development Minister Desmond Lee.

With this influx of flats, the government is expected to put up more shop spaces for tender as the retail catchment area for each region increases.

Sheng Siong should see ample opportunities to bid for these spaces in an attempt to increase its store count in these new HDB areas.

Get Smart: Success hinges on bidding results

Investors should be pleased to note that Sheng Siong has a good strategy in place to grow its top line.

Bidding for new stores should take place progressively this year but the group’s success will hinge on the results of these bids.

Elsewhere, Sheng Siong’s China subsidiary continues to be profitable, supported by its four older stores.

A sixth store is expected to be operational before the end of the second quarter of this year.

Investors will need patience to see if Sheng Siong’s strategy comes through.

If it does, the supermarket operator’s share price could well revisit its previous highs.

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Disclosure: Royston Yang does not own shares in any of the companies mentioned.

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