Large Singapore supermarket operator Sheng Siong Group Ltd (SGX: OV8) posted an increase of 0.4% in its net profit to S$133.3 million in FY2022 as compared to S$132.8 million in FY2021.
Meanwhile, revenue was down by 2.2% year-on-year (yoy) to S$1.34 billion in FY2022 from S$1.37 billion a year ago.
The decline in revenue was on the back of a continued normalisation from the pandemic following the ease in mobility restrictions, starting from April last year.
Despite of moderation seen in FY2022, I believe that Sheng Siong remains a good defensive play amid the potential global recession risk.
Here are five key takeaways from Sheng Siong’s FY2022 earnings.
1. Gross profit margin increases
In FY2022, Sheng Siong managed to grow its gross margin to 29.4%, as compared to 28.7% in the previous financial year.
This was mainly due to the change in sales mix.
Sheng Siong’s Group CEO, Lim Hock Chee, said:
“Sheng Siong has been able to successfully navigate through volatile economic and political conditions to deliver consistent results.
While sales continue to normalise from the effect of the pandemic, the current inflationary environment presents us with a unique opportunity to tap on consumer behaviour towards saving costs with our value-for-money proposition.”
2. Revenue dropped amid normalisation from the pandemic
The decline in revenue was on the back of a continued normalisation in Singapore as consumers are returning to work, shopping malls, restaurants and heading outdoors.
Instead of stocking up on groceries at home, more consumers dined out and spending habits have normalised.
This is why the comparable same store sales in Singapore was down by 4.8% yoy despite Sheng Siong opening five new stores; one in FY2021 and four more in FY2022.
3. Near-term benefits from Singapore’s Budget 2023
The Singapore government has rolled out Budget 2023 to help cushion the impact of inflation on the cost of living.
I wrote about the companies that will benefit from the Budget 2023 here.
Under Singapore’s Budget 2023, an additional of S$3 billion will be allocated to the Assurance Package (AP).
This will increase the cash payout for Singaporeans to between S$700 to S$2,250 over five years.
Aside from that, there is also the increased payout for the GST Voucher scheme and CDC Vouchers, which will benefit Sheng Siong.
The AP and GST Voucher will put more money in the hands of consumers to spend in Sheng Siong supermarkets for essentials.
Meanwhile, the CDC Vouchers will also provide a boost to the supermarket operator in 2024.
4. Expansion in China continues
Sheng Siong is expanding its footprint in China.
The supermarket operator has just signed an agreement to open its fifth store in Kunming, China.
Currently, the subsidiary in China only contributed 2.6% to the total revenue of the Group.
As Sheng Siong’s operations are already profitable in China, its expansion will be earnings accretive and should continue to drive earnings growth for the Group, especially with the shift away from COVID-zero in China.
5. Positive cash flow despite expansion and dividends paid
Another positive takeaway is the resilience of Sheng Siong.
Looking at the Group’s cash flow, Sheng Siong has managed to maintain a positive cash flow despite its expansion plans and dividends paid to shareholders.
At its current price, Sheng Siong is trading at a forward dividend yield of 3.9%.
In FY2022, the Group increased its cash by S$28.4 million to S$275.5 million as at 31 December 2022, with no borrowings.
The strong cash position will be an advantage in this rising interest rate environment.
Defensive play amid rising inflationary pressure
With rising inflation globally, consumers are likely to cut back on dining out and eat more meals at home.
This will benefit Sheng Siong as it continues to enjoy healthy demand for groceries with its competitive pricing.
Sheng Siong has also shown a strong track record in maintaining its gross margin over the years, despite the rising costs.
Management, however, cautioned that some of the challenges this year could impact operations and raise costs.
But with the domestic expansion and China expansion plans on track, investors who are looking for a defensive counter to ride through the current volatile market will find Sheng Siong to be an attractive stock.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
