Trade Action - Sheng Siong Group

A week ago, I initiated a stake in local supermarket retailer Sheng Siong Group (SSG) for my SRS equity portfolio.   I have been lazy to pen down my reasoning for this investment, but here it is at last.  This post summarizes my thoughts about investing in this company.

Pros for investing:

One of top three Singapore supermarket retailers
Sheng Siong Group is one of Singapore's top three supermarket retailers, according to a 2018 report (link) by the USDA (yes, the United States Department of Agriculture).  The other two are NTUC Fairprice Co-operative and Dairy Farm International Holdings, who owns Cold Storage, Giant and Market Place.  According to a chart by Maybank Kim Eng (link), Sheng Siong Group is the one of two retailers - the other being NTUC Fairprice - who has been consistently growing their market share over the past five years, from 16.9% in 2012 to 18.9% in 2017.  From a humble store in 1985, Sheng Siong Group now owns 54 stores across the Singapore heartland, with a retail space of nearly 500,000 square feet in 2018.

Operational discipline
Of course, aggressive growth without operational discipline is unsustainable over the long run.  This does not seem reflective for Sheng Siong Group.  In 2018, the company opened ten new stores, but saw two store closures as the buildings occupied were taken back by its owners for redevelopment.  SSG management is mindful to segregate new store sales versus same store sales, so that they can track each revenue growth carefully.  In its FY2018 report, SSG management astutely observed, "since the beginning of 2019, six HDB shops which were won by the competitors via online bidding in 2017 and 2018 are now vacant and have been released for re-tender."  Learning from your competitors' missteps is telltale sign of a sound management team.  SSG management is also focused on growing their fresh produce sales mix, which commands higher margins.  (That gets another score from me.)

Zero debt, stable equity base
For a company that operates a brick and mortar business, this company has ZERO DEBT.  Not even an auto loan for its delivery trucks.  Would you believe it?  Moreover, the shareholding base has been stable for the past few years.  No hanky panky stock options for management, no complex convertible instruments and definitely no need to reach out to its owners for more money now.

Healthy company fundamentals
Increasing market share (positive YoY revenue growth over past five years)
Healthy gross margin (26.8% in FY2018)
Zero debt (I can't emphasize it more)
Stable shareholding base (ditto)

Cons against investing:

Competitive retail landscape
When one is grabbing market share, you can be sure the peers will not be resting idle either.  There have been young upstarts (U Stars) and the rise of niche organic grocers, catering to health conscious Singaporean shoppers.  Moreover, traditional brick and mortar retailers face a perennial challenge from online retailers (RedMart, Honestbee).  Even market leader NTUC Fairprice Co-operative had recently revamped its e-commerce platform (Fairprice On) to fend off the challengers.  I have not seen SSG management take a serious stab at growing grocery sales on the web.  Perhaps the threat is not that serious...yet.

Price premium
Sheng Siong Group is covered by a few sellside brokers and is well researched by the market.  At the current price of $1.04, you will be paying a hefty 500% premium over NAV (19.30 cents).  This is not your typical hidden gem, but a polished jewel at the store front.  Per Buffett speak, would you be willing to pay a fair price for a good company?

China foray
Many local companies seem fixated with China as the ultimate sales nirvana, and Sheng Siong Group is no exception.  In November 2017, SSG opened its first overseas store in Kunming.  It recorded a loss of $0.7 million in FY2018.  In January this year, SSG entered into a lease agreement for a second store, expecting it to be operational in 3Q2019.  The road to China supermarket supremacy is laden with battle wounded foreign retailers (Wal-Mart, Carrefour, Tesco), and even dead carcass (Lotte Mart).  Hope SSG management has been copiously taking notes to avoid the pitfalls and potholes.  Understanding and localizing the sales mix will be key to survive - let alone thrive - on this land.

Final Thoughts

In May 2018, a value fund manager Mondrian Investment Partners bought 99,000,000 shares from Sheng Siong Group founders at $1.01 per share (link).  I have been watching the stock tussle at $1.08 for some time.  When it came within striking distance of my ideal price, I pulled the trigger.  I will surely load up if the stock price falls further to the dollar mark.  Now I have another reason to shop more at my neighbourhood Sheng Siong supermarket.

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Portfolio Summary for March 2019

As of 31 March 2019

Cash Equity

Security	# Shares
OCBC	900
Old Chang Kee	100
AIMS AMP Capital Industrial REIT	2,150

Portfolio Market Value = $13,132

SRS Equity

Security	# Shares
Sheng Siong Group	8,700
Frasers Centrepoint Trust	3,000
Keppel Corp	1,000
SingTel	2,000
CapitaCommercial Trust	3,000
SembCorp Industries	2,000
Frasers Commercial Trust	2,408

Portfolio Market Value = $42,932

March is another happy month for me. My company's long term incentive plan finally came to fruition, and I received a small sum as reward. Just in time to bolster my war chest for investment.

The market is rolling along nicely, even when US and China haven't agreed on a trade deal. Recent talk of the town was about the US Treasury yield curve inversion, though it didn't last very long. An inversion is said to be the harbinger of a recession. Looking at the mood in the market, a recession seems to be the last thing on people's mind. As we head into another earnings season, Wall Street is betting the US Fed will cut interest rates this year. Hard to see any justification for the Fed to do so in the near horizon.

Trade Actions

OCBC
I bought 900 shares of local bank OCBC for my cash equity portfolio at $11.06 per share . I have written out my reasoning in a previous blog post here.

Sheng Siong Group
I bought 8,700 shares of supermarket retailer Sheng Siong Group for my SRS equity portfolio at $1.05 per share. I've yet to pen down my thoughts for this investment. Will try to do so soon.

Dividends

There is no dividend event for my holdings this month.

Savings

The April 2019 Singapore Savings Bond (SSB) offered an average yield of 2.16% p.a., which is unappetizing to me. Granted, it is still better than most fixed deposit promotions out there. But I'm not going for it.

Looking Ahead

This week marks the start of the Qing Ming Festival, where Chinese folks will make their way to pay their respects to the deceased. It has been three months since my dad passed away, and I still think of him from time to time. Sombre mood aside, I'll be ready to pounce on any buying opportunity when earnings season (hunting season?) starts.

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Trade Action - OCBC

This company needs no introduction.  Recently, I had initiated a position of 900 shares at a price of $11.06 apiece.  This post summarizes my thoughts about investing in this company.

Pros for investing:

Diversified earnings across industry group and geography
Besides Singapore, OCBC operates in Malaysia (OCBC Bank Malaysia) and Indonesia (Bank OCBC NISP).  OCBC also has two brokerage businesses (OCBC Securities and OCBC Sekuritas), though the result of this division is nothing to shout about.  Another affiliate OCBC Wing Hang operates in Hong Kong and Greater China.  OCBC also owns wealth management unit Bank of Singapore, which has seen healthy AUM growth in FY2018.  Lastly, OCBC owns asset manager Lion Global Investors and an 87% stake in local insurer Great Eastern Holdings.  The diversity of earning streams across industry group and geography minimizes the probability of significant loss caused by a single event.

Recent earnings miss is temporary
OCBC reported lower than expected FY2018 earnings ($1.06 against street estimate of $1.11).  This was mainly attributed to unrealized valuation losses and absence of realized gains in the securities portfolio held by Great Eastern Holdings.  It is pretty normal when investments are marked to market, volatility will swing the valuations and thus impact reported earnings.  Warren Buffett had warned about this phenomenon in his 2017 Berkshire Hathaway Chairman's Letter (source).  Judging from the YTD gain in global equity markets, assuming the trend is sustainable through 2019, the securities portfolio should experience a positive rebound in valuation this year.

Share buyback
OCBC has been consistently buying back shares from the open market.  Some investors see this as a positive move, since it reduces the float and increases earnings per share.  However, it can be a double-edged sword when management does it without regard to the intrinsic value per share.  If we use OCBC’s reported NAV of $9.56 (before unrealized valuation surplus)(source) as a yardstick, then management is not purchasing the stock because it is cheap.  It is more likely an exercise to balance out shares issued under its employee share scheme.

Cons against investing:

Lower dividend than peers
Compared to DBS and UOB, OCBC distributes a lower percentage of earnings (payout ratio of 40.6% versus DBS 59.7% and UOB 51.5%).  This is nothing new, and the bank had explained its rationale previously (source).  According to the Business Times (BT), OCBC CEO Samuel Tsien defended the conservative approach against risks on the horizon.  Mr Tsien “feels that the market is going to be a rougher market” (source).  The CEO also denied looking for potential acquisition at the moment.  For a head honcho to go against institutional imperative – of distributing similar payout as its peers and risk a share price decline – either Mr Tsien is not afraid of shareholder activism, or something is brewing for the company that requires significant capital allocation.  I believe we will know in due time.

Dividend scrip option
Contrary to most investors, I do NOT like companies to offer dividend scrip option.  Firstly, it dilutes the shareholding of existing owners who do not wish to participate (either because of odd lot allocation, which makes it harder to dispose the position in the market, or because of cashflow needs).  Secondly, a dividend reinvestment plan is typically offered because the company wants to retain more cash in their coffers.  The question is WHY?  Why is there a need to set more cash aside?  Again, this circles back to my point highlighted earlier.  There may be something – positive or negative – stirring in the undercurrent.

Oil & Gas industry exposure still a drag
OCBC increased its bad debt provision for the oil & gas industry last quarter.  News finally broke in January when crude oil products supplier Coastal Oil Singapore went belly up with US$354 million debt (source).  OCBC Hong Kong unit was owed the lion’s share at US$122.7m.  In a separate BT article, CEO Samuel Tsien highlighted oil exploration had not increased as expected when oil is trading at US$60-70/bbl range.  Vessel charter still remained below breakeven rates by the bank’s repayment requirement (source).  In short, more pain before the bank is out of the woods.

Final Thoughts

Despite my apprehension from the reasons above, I had decided to go ahead with the investment in OCBC.  Of the three banks, DBS is my first preference, but at 12x earnings (OCBC 10x UOB 10x) and 1.3x book (OCBC 1.1x UOB 1.1x), it is still a tad too expensive for me.  Between OCBC and UOB, I see more growth potential in the former.  That said, I won't be adding to my OCBC position anytime soon.  Hopefully, the reason for OCBC management's conservative stance will come to light as time passes.

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Summary for February 2019

I love February.  No, it's not because of the CNY festivities.  (Why would a parent be happy when he has to give red packets instead of receive them?)  Rather, this is the month when I get my performance bonus.  My company doesn't pay 13th month annual bonus, so this is the sole incentive I can look forward to.  Thankfully, my boss is satisfied with my last year's performance, so I am rewarded with a 0.8 month compensation.  (Sadly, not even a full month, but this will have to do.)

Trade Actions

I didn't do any trade, because I was out of 'ammunition' for most of the month.  In March, I will fund my SRS account with my bonus.  That should provide me with some gunpowder to go hunting.  I am watching a few counters.  Hopefully, there will be an opportunity to pull the trigger.

Hyflux 6% Perpetual Capital Security
I have repaid my wife for her vested portion of the Hyflux 6% perpetual.  (She needn't have taken the risk with me.)  So now I effectively own $10,000 of a nearly worthless security.  Haha.  One painful episode in my investing journey.  Luckily, I didn't allocate a lot of money in this position.  It's time to move on.

Dividends

AIMS AMP Capital Industrial REIT
I received a letter from AACIREIT regarding their latest scrip option plan.  Pay date is 29 Mar 2019.  I like the flexibility where you can choose the proportion of your ownership to receive the cash dividend versus new units.  At the moment, I'm trying to get my position rounded to a nice whole lot number.  Alas, my number of units on hand is insufficient to do so.  So I opted to receive the full dividend in scrip.  Maybe next time.

Savings 

This month's yield on the Singapore Savings Bond (SSB) is rather low at 2.18% p.a.  I prefer to stay on the sideline for now.

Looking Ahead

Earnings season has come to an end.  Macro events are likely to take centre stage and influence the market.  Hopefully, any volatility will result in a favourable entry point to load up on stocks.

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