Cold Storage vs Sheng Siong

Sheng Siong Up. Dairy Farm Down. Here’s Why.

Ho Khinwai
Ho Khinwai

Ever since the government raised the DORSCON level to Orange in February and encouraged people to work from home, analysts and investors alike have been very bullish on supermarket stocks like Dairy Farm (SGX:D01) and Sheng Siong (SGX:OV8).

However, if you look at the stock price movements over the last one year, we can clearly see that Dairy Farm’s has been on a steady decline, while Sheng Siong is quite the opposite!

Why is that? Also, why did Sheng Siong’s price sport a significant increase in April?

A Different Set of Interim Performances

While both stocks had fallen heavily in late March as the number of COVID-19 cases and economic outlook worsened, the two also recovered in April as the circuit breaker was implemented and things seemed like they were under control.

However, stock movements diverged as interim performance updates for both companies were released on 28th April 2020.

For Dairy Farm, management disclosed that performance had been “significantly affected” by COVID-19. While its Grocery Retail segment had seen good profit growth in 1Q20, it was “far outweighted” by the negative performance from its Health and Beauty segments, convenience stores, and it’s restaurant affiliate Maxim’s.

Dairy Farm’s health and beauty segment includes pharmacies such as Guardian (in Southeast Asia) and Mannings (in China and Hong Kong) which have seen increased demand for personal protection products and have kept open for operations as “essential services”.

However, this has not been enough to offset declining sales from reduced store footfall, as well as from its other Health businesses like GNC (China).

Additionally, management has cautioned that Q2 performances will be equally dismal as social distancing begin to take effect in Malaysia and Indonesia.

For Sheng Siong, we see a starkly different picture. Management disclosed in its Q1 Business Updates that they’ve “performed exceptionally well”.

Sheng Siong is much more simple and focused – with business activity only in supermarket operations.

Overall revenues had increased 30.7% compared to 1Q2019, surpassing analyst forecasts and estimates.

Same-store sales growth (SSSG) was impressive at 19.7%, as consumption shifted from restaurants to grocery stores owing to the circuit breaker.

Managment has also reassured that supply chains were stable – in part due to larger stockpiling in 4Q2019.

Investors Are Forward Looking

Sheng Siong’s share price had already been increasing strongly way before the April 28 announcement, while Dairy Farm’s had trended sideways a week prior.

Thus, investors who waited for Sheng Siong’s Q1 business report before entering would have only gained 6.2% till date on the trade – as compared to a whopping 47.6% at the March lows.

Without analyzing too much into the minutiae, we believe investors were already more optimistic on Sheng Siong (and more uncertain on Dairy Farm) in the mid-term if you look at the fundamentals.

Diverging Mid-Term Fundamentals Foreshadow Future Performance

Dairy Farm’s operating results had been lacklustre, as compared to Sheng Siong’s, for the last 5 years.

Dairy Farm’s ROIC was 3.72% at FY19, as compared to 23.73% for Sheng Siong. This metric indicates profitability – and clearly Sheng Siong wins this one.

Amidst the COVID-19 pandemic, debt management and liquidity becomes especially important for businesses to survive.

Sheng Siong, impressively, does not have any debt on its balance sheets. Dairy Farm, on the other hand, has increased its debt over the past 5 years and unfortunately only has a 1.31x Interest Cover.

Moreover, Sheng Siong’s current ratio is way higher at 0.96 than Dairy Farm at 0.36.

Investors may therefore conclude that Sheng Siong is in better stead to ride out the pandemic, whereas there is a lot more uncertainty for Dairy Farm.

Ho Khinwai
Ho Khinwai
Equity investment analyst at Dr Wealth. Value investor at heart. He holds a BBA (Finance) degree and occasionally writes for SumZero and SeekingAlpha.
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