Sheng Siong Group

[CityFarmer]

Well, guru has different opinion, time to review my numbers.

I noticed that there are two major differences between our workings.
- Your revenue growth is solely derived from retail GFA growth. On top of retail GFA, higher same-store growth, and contribution from virtual store i.e. online stores are also considered in my workings.
- In your working, acquisitions are solely funded by cash reserve, but I did assume cash and debt funding. Property investment without leverage doesn't seem a good idea to me.

Let's touch on the common point. I do agree dividend payout might not sustain. During two years post-IPO, the dividend payout seems partially support by cash research. Dividend payout was 38 mil (2012), and 41 mil (2013), while the OCF was 34 mil (2012) and 45 mil (2013), excluding the maintenance CAPEX, which can be more than 5 mil each year. But I am more concern on cash flow, than dividend growth.

Next point on same store growth. There are few ways to increase it, one is 24 hours operation, and other one is better product mix with higher margin products. FYI, there are 28 stores, out of 33 stores, are operating 24 hours in SS. Most of them started in FY13, with the latest three started Oct 2013. It takes time for them to reach full cap.

Ref: http://www.shengsiong.com.sg/pages/Media-Center.html

Better product mix is another way. Same for the newly started online store. I was skeptical on online store of SS, till I started using NTUC online store. I found it might work for SS. I would like to refer to Mar 3 version of The Edge. There was a write-up on Redmart, and stated the popularity of online purchase, if done right. I really don't see the reason why SS can not compete with Redmart. Let's give SS time to get it right. SS has all the resources to scale up as fast as demanded, IMO.

Let's come back on the property venture. I will take it as separate business segment of SS. The funding of the venture is either by internal fund or debt. Let me take your number as reference. A 20% growth of GFA, means 60K sq ft, will need capital of 30 mil (assume 2k per sq ft, which is on low side, IMO). A LTV of 60% means cash outlay of 12 mil. So the 100 mil cash reserve is able to support more years, after factoring in the rental cash flow from the properties acquired.

I hope the numbers are right. Feel free to highlight if any.

(vested)

(There was a slight numerical error in my previous post, so i made some corrections and reposted)

I have ShengSiong in my watchlist but have problems justifying its valuation.

At price of 60c => P/E >20 and P/S ard 1.2. This seems rich compared to other comparables.

Let's assume earnings is a function of gross floor area

Data shows:
2011 340k sqf with EPS = 1.97c
2012 400k sqf with EPS = 3c

Since the announcement of a shift of plan to purchase i/o lease, there were 2 acq plans of which Kallang was aborted subsequently.

Kallang Bahru 779sqm (ard 8.3k sqf) for 13.5mio => cost psf = $1626
Yishun 1729 sqm (ard 18.5k sqf) for 54.9mio => cost psf = $2967

so let's average it out and call it $2k psf. (this is obviously bit rubbish since locations and tenures vary)

To expand at the rate from 2011 to 2012 annually will require 60k sqf, and let's assume that 25% of this is thru purchase with the rest thru leasing (which the firm has said is tough)

That means an outlay of 0.25*60k*2k= 30mio p.a.

The latest annual profit is ard 40mio and the firm has 100mio cash.

So the analysis above is rather crude since there are so many factors to permutate, but I think there's a rough feel of what it means capital-wise by expanding thru acquisition.

My take:
1) while the firm has 100mio of cash now and can readily deploy it for acquisition for 1-2 years, a dividend cut looks likely.

2) The attraction of ShengSiong is the cash generation ability and a more aggressive expansion mode will likely result in -ve FCF or increased borrowings, which is somewhat contradictory to the investment thesis.