Is Sheng Siong a Good Stock to Buy Now?

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore with a network of 61 stores that are primarily located at the heartlands of the island.

It also has two stores in China. The company was established in 1985 and listed on the stock market in 2011.

The company has delivered good investment returns to shareholders over the last five years thanks to the doubling of its share price. But is it still a good buy now?

I’ll try to answer this by looking at two important aspects of the company; business performance and valuation.

Business performance

One of the most important areas to consider before investing in a stock is whether the company has a stable and sustainable underlying business. The reason is simple.

A stable business will allow the company to sustain and better still, grow its profitability over time, which will power a growing stock price.

There are many ways to look at this. One is to analyse its historical performance. Generally, a company that has a proven track record in the past has a good chance of repeating that in the future, assuming there’s no material change in the external operating environment.

Let’s look at some numbers (from over the last decade) to give us some perspective. To start with, revenue grew from S$625.3 million (US$449.4 million) in 2009 to S$991.3 million in 2019, which is a compound annual growth rate (CAGR) of 4.7% during the period.

Gross profit performed even better, up from S$128.4 million in 2009 to S$266.9 million in 2019, which is a CAGR of 7.6% for the decade.

Consequently, net profit improved from S$33.6 million in 2009 to S$75.8 million in 2019, up by a CAGR of 8.5% during the period.

As we can see, not only did Sheng Siong increase its revenue over the last decade, it grew its bottom-line by even more thanks to operating leverage.

Going forward, Sheng Siong is well-positioned to sustain its performance since it’s providing a necessary service to society.

Valuation

As investors, we always try to buy something at less than its value. In simple terms, that means paying less than S$1 for each dollar of assets. This is important since a good company might end up a bad investment if we overpay for it.

One way to gauge Sheng Siong’s valuation (overvalued, fair, or undervalued) is to compare its price-to-earnings (PE) ratio and price-to-book (PB) ratio to the market average. Here, I’ll be using the SPDR STI ETF (SGX: ES3) as a proxy for the market.

From the above, we can see that Sheng Siong is trading at a significant premium to the market average on both metrics.

Thus, investors should consider whether it’s prudent to purchase its shares at current valuation.

Foolish conclusion

Overall, Sheng Siong is a good stock for investors to consider thanks to its solid track record over the last decade.

Yet, investors should avoid buying its stock now given its high valuation. Instead, I think they should keep the stock on their watchlist and wait for a better entry point.

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