Nuffnang

Saturday, 6 August 2011

Sheng Siong Group Ltd

Sheng Siong Group Ltd ("the Company") is selling 201.5m New Shares and 150m Vendor shares in the upcoming IPO. Out of the 351.5m shares, 15m will be for the public and the rest via placement at $0.33 each.


The Company is one of Singapore's largest retailers and operates the Sheng Siong chain of supermarkets and groceries outlets. At the date of prospectus, there is 1 hypermarket, 22 supermarkets and 3 wet market stalls.  The Company also operates a new warehouse at Mandai Link to improve its economies of scale.


It is "heart-warming"to see a local household brand that is able to take on the competition from NTUC Fairprice, Cold Storage/Giant/ShopNSave (under SGX-listed Dairy Farm) on its local turf. You have to give it to the owners who build the company up from scratch a midst such tough operating environment.


Revenue grew from $610m in FY2008 to $628m in FY2010 and net profit also grew from $20.6m to $42.7m during the same period.  This is the results of improvement in operating margins (rather than revenue growth) from 3.4% to 6.8% during this period.


In my personal view, the Company has reached a 'saturation' point in Singapore in terms of operating efficiency or market potential.  It is likely to pitch itself as a stable business with strong cash flows that pays good dividend. The Company has "promised" to pay up to 90% of 
net profit for FY2011 and FY2012. I believe this 'promise'was inserted to "boost" investors' interest in this counter. From my market sources, the initial demand for the IPO was rather weak, thus it came as a surprise to me that it was finally able to 'launch' the IPO when Dow Jones had its biggest drop that week. 


Based on the post-invitation no. of shares, the EPS grew from Singapore 1.53 cents to 3.18 cents. At the listing price of 33 cents, the listing PER is 10.4x. It is interesting to note that there will be 'stabilization' manager if there is over-allotment, which in my view, will be tough to achieve. The market cap will be about $442.7m. The IPO will close on 15 Aug and starts trading on the 17 Aug. The founders will be 'richer' by $49m as they will be cashing in at the IPO but it is also interesting to note that they will be taking a huge pay-cut from FY2011 onwards in terms of basic pay but this excludes the 'service bonus' which they may get if the Company continues to perform. Tan Ling San, who founded PSC was brought on in 2006 and he is actually more highly paid than the 2 Lim Founders and head the expansion of the Company. Amazingly, Tan Ling San is not holding any shares but his two "associates"will be subscribing for up to 6.5m shares. That is worth $2.145m and it is hard to imagine that they are not holding in trust for him.


Dairy Farm, which is a listed giant with forecasted revenue of US$9 billion and a net profit of US$492m is trading at a 2011 forward PER of 24x. The net profit margin for Dairy Farm for FY2010 was around 5.2%.  Another comparable PSC (that operates Econ Minimart stores) is trading at around 9.1x PER but has a lower net profit of $14.2m for FY2010.


In my view, the IPO is launched during a challenging period, hence there is unlikely to be significant upside in the near term. The fact that Company is paying up to 90% of its net profit for the next 2 years may provide some downside protection but come to think of it, the founders still own 60% of the Company, thus it doesn't really hurt too much for the founders.  For investors who want to hedge against a rising cost of living, buying the shares may not be a bad idea as it provides a 'natural hedge'.  Should it fare badly during the initial period, it may not be a bad idea to buy some of the shares. Assuming a similar EPS of 3.18 cents for FY 2011 and a payout of 80%, the projected DPS is about 2.5 cents and that translate into a respectable yield of 7.6% per year for the next two years. That could prove to be very attractive for pension and insurance fund managers to buy into the firm. I would give it a 2 Chilli ratings based on "cheaper-than-peer"valuation and the decent yield it is projected to give out.


PS:  In case you are wondering if the rumour that the Sheng Shiong family is related to the Lee HL family is true, according to the independent director whom i spoke to recently, there is absolutely no basis in that rumor....
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