I wrote an earlier review in Aug on Sheng Siong. The price has since returned to where it was in Aug and I am reviewing my moral position again -- they might not be exploiting low wage workers.
Government Grant
In their quarter ending 30 Sep 2016, they reported that expenses had increased because more bonuses were paid out. I actually changed my mind and was willing to reconsider Sheng Siong because they said they paid their employees more. However, the grants received from the Wages and Special Employment Credit Scheme and Temporary Employment Scheme is still substantial. Using straight-line projection, $4.8M worth of grants will be recorded under 2016. In 2017, the grants will be reduced by half, so expenses will increase by $2.4M, assuming all things equal. In 2018, when the scheme ends, expenses will increase by another $2.4M, again, assuming all things equal. Impact on profit is expected to be about 4% in 2017 and 8% in 2018.
Negative Cash Flow
They had been operating with negative cash flow. The good thing is that they are very honest about it and stated it in the executive summary of the financial report. As I was just reviewing Asian Pay TV yesterday, and lamenting about how sneaky they are to hide the negative parts of their finances, I like that Sheng Siong wrote their Capital Expenditure (Capex) in the cash flow statement too. Unfortunately, I get the feeling that they are paying out too much dividend. For illustration, if they don't pay dividend, then cash flow will probably be around $0, so they are channeling all their operating cash into dividends and Capex is funded by debt/cash. I will think that halving the current dividend is more sustainable.
Debt
Liabilities/Equity is 0.48x. The financial report states that the company has no borrowings, hence I can't exactly say that I can calculate a Debt/Equity ratio. "Trade and other payables" was reported as $102M. This is probably something I want to find out what makes up this amount. It could be an innovative way of managing cashflow. An example is Warren Buffet's Berkshire Hathaway that uses insurance premiums to fund investments and operating cash requirements, and they report zero debt in their books year after year. I wonder what kind of arrangement Sheng Siong has for this, but I am going to give them credit for it, assuming it's legal.
Entry Price
My only issue is the Price Earning Ratio is 24.7. I would have preferred it to be nearer the range of 15. Enterprise Value/EBITDA is 20, and I would have preferred it to be nearer to 10. Overall, the price needs to be half of the current to be attractive, but it's probably over valued because of its growth potential, just like how Raffles Medical Group sustained 1% yields for consecutive years -- it was consistently over-valued for 10 years and anyone who was waiting for the price to drop would never had bought anything. In the short term, there may be some price weakness because of store closures and new stores waiting to be opened. They also didn't report their online store profits, which I am interested to know, but I guess it isn't doing well that's why it's not mentioned anywhere. I will probably review Sheng Siong again after the next quarterly report.
Hi little toy brush, another interesting post again. I've had the same question you did regarding how to calculate debt/equity when a company has no bank borrowings. This is true of many consumer companies that collect cash on goods sold such as Jumbo, Nestle and even Kimly. They have very cash-generative businesses, so they have less need to borrow money.
ReplyDeleteIn fact, I think having high trade payables may actually be a good thing, as it suggests that the company has a certain power over its suppliers such that they can get good payment terms. Morever, the cash that they hold can have investment potential (like Berkshire Hathaway as you mentioned), even if it's just the opportunity to put the cash in short-term fixed deposit to collect interest income.
Anyway, these days I actually calculate both debt/equity and liabilities/equity in order to compare across companies with significant bank debt vs those with minimal/no bank debt. Would love to hear how you're accounting for these differences when you do peer comparisons across companies too!
I usually will ask myself if the liabilities/equity is something that can be risk-managed. For e.g., banks have governance structures to manage the risk and also quarterly report the non-performing loans. For Sheng Siong, it's not clear how sustainable this borrowed cash flow is, so I don't really want to count on it. In fact, at 0.48x, I will find it high because it can interpreted as holding on to a lot of "inventory". If it's like insurance premiums with contract penalties in place to deter the premature withdrawals, I will say the risk is managed.
ReplyDeleteFor supermarkets, I will go after the inventory turnover rate, which is a measure of how fast they can sell their goods that they are stocking up. As this rate is not reported, it's also a bit more tedious to compare the quarterly reports line items, so I will only do it when the price screams buy buy buy. For restaurants, I look for profit margin, as it's a value adding service model.