Earnings are coming in fast right now. Sheng Siong Group Ltd (SGX: OV8), Singapore’s grocery retailer, last week reported slight weakness in its earnings during H1 FY2023 amid rising costs.
The earnings reported underperformed against market expectations, but Sheng Siong still managed to grow its revenue during the H1 FY2023.
Here are some key takeaways for investors from the earnings dip reported in the H1 FY2023.
1. Revenue growth continues in the H1 FY2023
In H1 FY2023, Sheng Siong’s revenue witnessed an uptick, rising by 2.0% year-on-year (yoy) to S$690.5 million.
This growth was primarily propelled by the addition of new stores.
Notably, these strategic store expansions enabled the company to align with analysts’ revenue projections.
2. Earnings declined amid rising staff costs and utilities
Against the backdrop of rising staff costs and utilities, Sheng Siong saw its net profit decline by 2.9% to S$65.5 million in H1 FY2023 as compared to S$67.5 million in H1 FY2022.
The spike in labour costs was mainly to retain and attract workers amid the tight labour market.
Reflecting this downturn, earnings per share also tapered off by 2.9%, landing at 4.35 Singapore cents.
3. Gross profit margin improved on improvements in the sales mix
On a positive note, the gross profit margin of Sheng Siong improved slightly from 29.4% to 29.7%, mainly attributable to improvements in the sales mix.
This turned out to be a record quarter for Sheng Siong’s gross margin.
Management has guided that it will continue to seek ways to improve its sales mix and focus on strengthening its core competencies to improve its operational efficiency and productivity.
4. Strong operating cash flow
For H1 FY2023, cash flows from operating activities witnessed a robust increase, reaching S$77.8 million, up S$17.7 million from the S$60.1 million reported the previous year.
This surge was primarily due to allocating more funds towards settling accrued bonuses and clearing outstanding supplier dues in H1 FY2022.
As the books closed on 30 June 2023, the cash and cash equivalents position stood strong at S$289.0 million, marking a rise of S$13.5 million from the S$275.5 million recorded on 31 December 2022.
5. Growth on the horizon with HDB’s supermarket ventures
New stores opened in Singapore contributed S$29.3 million to H1 FY2023 revenue, but the increment was partially offset by a 1.0% decline in revenue of comparable stores.
Going forward, Sheng Siong’s growth trajectory appears promising.
With Housing Development Board’s (HDB) upcoming tender of six new supermarket outlets in the next six months and another five till 2024, Sheng Siong is well-positioned to anchor some of these ventures, bolstering its growth.
Sheng Siong is targeting to open three to five new stores over the next three to five years.
Sheng Siong is a defensive play with growth and dividends
Sheng Siong continues to shine on our radar as the retail operator is a suitable defensive play for long-term investors.
Aside from that, the Sheng Siong Group has a strong track record.
With the potential to tap into the expanding new HDB supermarket pipeline, this could offer resilient growth.
On the plus side, Sheng Siong offers a forward dividend yield of 3.5%.
However, it is crucial to be aware of the potential downside risks, such as a delayed store inauguration, reduced sales demand and per-square-foot traction, and challenges in retaining the current gross profit margin.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
