Dairy Farm vs Sheng Siong

Someone asked me about my thoughts on Dairy Farm International Holdings Ltd and Sheng Siong Group Ltd.

First to clarify, I think it is impossible to give a detailed analysis on both these big companies in a single blog post. Dairy Farm has an Enterprise Value of USD 8.90B (SGD 12.6B) while Sheng Siong has an Enterprise Value of SGD 1.12B.

1. Scale

It could be a case of David (Sheng Siong) vs Goliath (Dairy Farm). To get a feel of the scale of Dairy Farm, I have extracted the following from their 2014 Annual Report:

• 6,101 retail outlets in China, Taiwan, Hong Kong, Macau, Vietnam, Cambodia, The Philippines, Malaysia, Brunei, Singapore, Indonesia.
• 2,279 Convenience Stores, 1,132 Supermarkets/Hypermarkets, 1,800 Health and Beauty, 881 Restaurants & 9 Home Furnishings.
• Giant, 7-eleven, Market Place, Starmart, Mannings, Guardian, GNC, IKEA in Hong Kong and Taiwan, Maxim’s in China, Hong Kong & Vietnam.

In the case of Sheng Siong Groceries Chain: 33 stores all across Singapore as at 31 December 2012. Towards the end of 2014 and in January 2015, 2 new stores were opened in Penjuru and at BLK 506 Tampines Central 1 respectively.

Having said that, this is probably one of the reason why I did not do a post on Dairy Farm (and subsequently Sheng Siong). It is big and complex.

Yes, it would probably be a defensible stock due to to nature of its business (grocery, health & beauty, furniture etc) – cheap, dull, perishable, disposable, and commonly used.

“Buy companies with strong histories of profitability and with a dominant business franchise.” Warren Buffett

However, I tend to look for (and prefer) small, high growth, simple businesses.

2. Near perfect business / Not perfect (at least in the Singapore Context)

The business of Supermarkets / Hypermarkets in Singapore has another player which is NTUC Fairprice. When it was first created, its aim was to fight inflation and hoarding of essential foodstuffs, control prices and curb profiteering. Today, FairPrice provides an important assurance to Singaporeans that they will always have somewhere to turn to for their basic needs. Fairprice continues to have a social mission, and gives people comfort that they will not be victims of profiteering.(read here).

Hence, here there is this element of government regulatory intervention – which prevents any single company from creating a monopoly (or any 2 companies from creating a duopoly). A moat in this context would be difficult. Note: 2014 saw the launch of warehouse retail, a new grocery retail format by NTUC FairPrice in Joo Koon, followed by Big Box in Jurong East.

Esp. for essential items like food & household items – these are the very items that the majority of the population focus on (esp. when people complain about inflation. I am sure the recent political rallies would have touched on this). Dull products but hot button topic.

In fact, while reading the Value Buddies posts, someone mentioned about buying shares of NTUC Fairprice (which was however unavailable anymore).

Sometime the greatest profit can be found in companies providing services or products whereby the amount we are not concerned about or aware of (essential, dull, mundane, small / tiny amounts – that slip under our nose and even beyond politicians’ radar). Case in point: Are you aware of the charges you are paying for your flat or estate maintenance? Or for refuse collection? Since we are at the topic of Supermarket chains – every-time you buy grocery, think deeper, about the steps you take to buy anything…Every-time you swipe your Debit / Master Card, use PayPass, how much the Point of Sales (POS) machine vendors (NeraTel) is earning or Visa / Master Card is earning? or even when you withdraw cash from ATM – how much the banks deduct for this service? I don’t know and can’t be bothered. It could be a few cents, a fraction of a cent etc – but the sum of all these add up. And as a company, I can raise 5%, 10% or 100% without much resistance. That is the Holy Grail to Capitalists!

If I am the boss of a supermarket chain, I will have to pray hard if I am raise prices by a few percentage every-time. And hope that they won’t raise it up in parliament.

Any blue-blood, hard core capitalists would loathe the two words “curb profiteering”. Oh yeah, don’t forget I am still vested in SMRT (it has been not been a pleasant experience so far)…. The inability to raise price (no matter how big the monopoly) is a deterrent to any investors looking for high growth and high profit margin entities (with a strong & wide business moat).

3. So-so EPS growth rate

I like fast growing companies. Companies with high ROE and also high 5 years EPS growth. A blog post by Bigfatpurse put this criteria quite concisely (read here). I don’t find their 5 years EPS growth spectacular. Good but not outstanding (For comparison: Sarine Technologies’ 5 year EPS growth is 75.46, Colex’s 5 year EPS growth is 25.11, Riverstone’s 5 years EPS growth is 14.90  & Super Group’s 5 years EPS growth is 10.52). In addition, these companies may not have as high ROE, but their debt/equity ratio (balance book) as compared to Dairy Farm’s is better.

4. Not good free cash flow trend

Both Dairy Farm and Sheng Siong free cash flows have been trending down over the years. Not a good sign. Will you be happy to hold these two stocks for the next 10 years?

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Warren Buffett

 

Ok, perhaps in this post I shall just scratch the surface on the comparison between these two companies.

1. High ROE. When I look at their financials, what struck me first is the high ROE (and low profit margins). Dairy Farm has a ROE of 32.22%, Profit Margin of 4.13% & Operating Margin of 4.16%. Sheng Siong has a ROE of 26.15%,  Profit Margin of 6.97% & Operating Margin of 8.06%. So on surface it may appear that Diary Farm is the more productive company due to its higher ROE alone.
2. Debt. However, if we go deeper. Dairy Farm has Total Cash of USD 368.90M & Total Debt of USD 958.10M. So if we minus off the debt from the cash, we end with with a net debt of USD589.2M. Total Debt/Equity is 65.89. Current Ratio is 0.48. Not good at all. However the reason for the debt may be for the longer good (read here) – which remains to be seen. On the other hand, Sheng Siong has Total Cash of SGD131.68M with no debt. Current Ratio is 1.85.

“I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.“ Warren Buffett

“Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is solvent before you risk your money on it.” Peter Lynch

So we have a situation whereby Dairy Farm has better ROE but its balance sheet is weaker than Sheng Siong.

So perhaps the better ratios to use would be ROA & ROIC (read here and here). See below.

However, it appears that Sheng Siong has better ROA over the years while Dairy Farm has better ROIC over the years (although the TTM ROIC shows that Sheng Siong has better ROIC). To go even deeper, between ROA & ROIC, the ROIC is the most informative ratio to use (read here).

However, it is observed that for both companies, the ROIC ratio has been trending downwards over the years. Also the ROIC (TTM) for both these companies are really close.

So if one is undecided about using ROIC to differentiate the two companies, perhaps the Profit Margin may offer another gauge. Sheng Siong’s Profit Margin of 6.97% easily beat Dairy Farm’s Profit Margin of 4.13%.  Of course the question is whether Sheng Siong can maintain such ‘high’ Profit Margin (read here).

“Frequently, you’ll look at a business having fabulous results. And the question is, ‘How long can this continue?’. Well, there’s only one way I know to answer that. And that’s to think about why the results are occurring now – and then to figure out the forces that could cause those results to stop occurring.” Charlie Munger

Below is an extract from the Sheng Siong website (comments on the business outlook):

Competition in the supermarket industry has intensified lately as there were more promotions, with some made in conjunction with “SG50.” Demand remains tepid and this is likely to persist so long as the local economic conditions continue to remain lackluster….

As some of our old stores in matured housing estates have seen declining same store sales, the Group will continue with the program to renovate such stores and one of these stores would be renovated in the second half of FY2015….

The Group’s Joint Venture in Kunming, China has been registered in May 2015 and the first store could be opened towards the later part of FY2015.

It appears that Sheng Siong’s outlook is not that bright. In addition, China is slowing.

 

So is Dairy Farm or Sheng Siong good enough to buy now? (read here). I think I shall skip the intrinsic value calculations for now and use the example from Motley Fools eg. the P/E ratio. It is a simplistic way of comparing.

Next, let’s think about their Trailing PEGs.

• Trailing PEG of Dairy Farm is 16.34/(3.74+6.88) = 1.53 (not good, more than 1)
• Trailing PEG of Sheng Siong is 25.27/(3.85+5.96) = 2.58 (not good, more than 1)

 

In gist:

A single blog post would not do justice for an analysis between these two big companies.

Nevertheless, I think the sheer scale of Dairy Farm present a hurdle for comprehensive study (and perhaps a hurdle for fast growth). Consequently, the EPS growth rates of both Dairy Farm and Sheng Siong are not outstanding.

The presence of this silent party – Fairprice create a situation whereby pricing power (business moat) is difficult for any of these companies.

Free Cash Flows of these 2 companies are also trending down over the years.

Lastly, the PE and PEG ratios seem to suggest that the stock prices may be still over-valued.

“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” Charlie Munger

“If you can’t find any companies that you think are attractive, put your money into the bank until you discover some.” Peter Lynch

Ok – to get back to the main topic of this post (comparison between Dairy Farm & Sheng Siong): If I am to choose between the two, I would prefer Sheng Siong as it has a better balance sheet (zero debt), higher profit & operating margins, and smaller in scale (in very simplistic term – more scalable potential. Eg. easier to earn 10% of 1 million as compared to 10% of 1 billion).