Grocery Shopping for Stocks: Dairy Farm (SGX: D01) vs Sheng Siong (SGX: OV8)
For many of us, grocery shopping is a weekly affair. In fact, I do it so frequently that I can visualise my grocery shopping route before I step foot into the Sheng Siong outlet in Bedok. And I’m willing to bet that you are quite familiar with your local grocery store too.
On that note, Warren Buffet had mentioned that he restricts himself to businesses that he is familiar with. Hence, I am going to compare two of Singapore’s biggest grocery chains here – Dairy Farm International (SGX: D01) and Sheng Siong (SGX: OV8), whose businesses we are more familiar with.
Business Models Of Dairy Farm vs Sheng Siong
Dairy Farm International Holdings Limited (SGX: D01)
Some of the more famous supermarket chains that Dairy Farm operates include Cold Storage, Market Place, Giant and 7-Eleven.
However, they also operate health and beauty stores such as Guardian and home furnishings stores such as Ikea. Some of these businesses are also operated in Hong Kong, Malaysia and Indonesia.
Astonishingly, Dairy Farm employs over 230,000 staff! That’s almost 4% of Singapore’s population.
Supermarkets and hypermarkets are one of the most important business segments to Dairy Farm, contributing the most amount of revenue.
Sheng Siong Group Limited (SGX: OV8)
Sheng Siong is also another one of Singapore’s largest retailers and as of 2018, they had 54 stores located here. Sheng Siong is probably most well-known for the “wet and dry” shopping options they offer, which is a response to the rapid urbanisation that Singapore had undergone over the last few decades.
Sheng Siong has also undergone changes over the years, such as their launch of their online grocery platform in 2014 and their recent but minor expansion into China.
Revenue and Profitability Of Diary Farm vs Sheng Siong
| Dairy Farm | Sheng Siong | |
|---|---|---|
| FYE 31.12.18 | FYE 31.12.18 | |
| Revenue | $11,749m (USD) | $890m (SGD) |
| EBITDA Margin | 3.77% | 11.35% |
| Operating Profit Margin | 1.82% | 9.50% |
| Net Profit Margin | 0.66% | 7.92% |
Some Definitions
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. This just means earnings without these associated costs. Operating Profit refers to EBIT or Earnings Before Interests and Taxes. Net Profit refers to revenue minus all sorts of costs.
The margins of these metrics refer to the figures over revenue. For example, the EBITDA margin is EBITDA divided by sales.
Comparisons
It is clear that Sheng Siong is more profitable than Dairy Farm, despite Dairy Farm having much higher revenues. Sheng Siong is, therefore, the obvious winner in terms of profitability.
To read my in-depth analysis of Sheng Siong, click here.
Balance Sheet
| Dairy Farm | Sheng Siong | |
|---|---|---|
| FYE 31.12.18 | FYE 31.12.18 | |
| Current Ratio | 0.45 | 1.21 |
| Debt/Assets | 0.19 | 0 |
| Debt/EBITDA | 2.335 | 0 |
| Interest Coverage | 6.22 | No Debt |
Some Definitions
The current ratio is a figure used to represent short-term liquidity, which is how well a business can fulfil their short-term financial obligations. The higher the current ratio, the better.
Debt/Assets is a measure of how much debt there is relative to a company’s total assets. Typically, the lower the ratio, the better position the company should be in when paying off debt.
Debt/EBITDA measures how much debt there is relative to earnings. The lower the ratio, the better.
Interest Coverage Ratio represents how much earnings there is relative to interest payments. Again, the lower the ratio, the better.
Comparisons
Again, Sheng Siong is the clear winner here, with much higher short-term liquidity and no debt. Hence, Sheng Siong has a stronger balance sheet.
Efficiency
| Dairy Farm | Sheng Siong | |
|---|---|---|
| FYE 31.12.18 | FYE 31.12.18 | |
| Basic Earning Power | 3.96% | 19.41% |
| Return on Equity | 5.20% | 24.12% |
| Return on Capital | 9.54% | 41.28% |
Some Definitions
An important question to ask when comparing both companies would be which is more efficient in their use of assets and resources.
Basic Earning Power (BEP) measures how efficient a firm is in generating operating income through their assets. ROA is calculated by taking EBIT divided by Total Assets.
Return on Equity(ROE) is a measure of how well a company uses shareholders equity to generate earnings growth. ROE is calculated by taking Net Income divided by Book Value of Equity.
Return On Capital (ROC) is a measure of how profitable a company is relative to debt and equity capital invested. Here, I calculated ROC by taking EBIT divided by (Book Value of Debt+ Book of Value of Equity-Cash).
Comparisons
Again, Sheng Siong is the winner here, with their metrics being much higher. Sheng Siong’s ROC is very high due to their high cash balance and no debt. Additionally, Sheng Siong has a much higher ROE predominantly due to their higher Net Profit Margin.
Valuation
| Dairy Farm | Sheng Siong | |
|---|---|---|
| Market Cap | 10.32B | 1.62B |
| P/E Ratio | 112 X | 22.5 X |
| P/B Ratio | 7.13 X | 5.24 X |
| P/S Ratio | 0.88 X | 1.78 X |
Some Definitions
Market Cap refers to the market value of a listed company’s outstanding shares.
It is calculated by taking the total number of shares outstanding multiplied by the share price. This is a common metric used to determine the size of a company.
P/E, P/B, and P/S ratios are all different metrics used to value a company. These ratios represent how much you are willing to pay through the purchase of shares for a certain portion of a company’s performance.
The P/E ratio represents how much you are willing to pay for every one dollar of the company’s earnings. For the P/B ratio, it represents the price for every $1 of a company’s book value per share. Lastly, the P/S ratio represents the price of every $1 of revenue per share.
The higher these ratios are, the more “expensive” the stock is.
Comparisons
Dairy Farm has a much higher valuation than Sheng Siong. However, Sheng Siong stocks seemed to be priced more cheaply than that of Dairy Farm’s, with a much lower P/E and P/B ratio.
One reason why Sheng Siong’s P/S ratio is higher (despite lower P/E and P/B ratio) could be due to the much higher net profit margin, which is a companion variable to the P/S ratio.
When we account for the difference this way, it seems that Dairy Farm’s stocks are more “expensive”.
If you’d like a more in-depth analysis of Dairy Farm, click here to read what I wrote in answer to this Stocks Discussion on Seedly’s Q&A platform.
In fact, if you’re curious about any other stocks or have any other personal finance related questions, why not try asking in the Seedly Q&A? The community’s really active and they give really good answers too!
Closing Thoughts
It is undeniable that grocery shopping will remain a part and parcel of our everyday lives, and it’s a business that we probably understand a bit more.
So if you’re looking to invest in the retail segment, it would be good to keep an eye on these two companies.
To recap:
- Dairy Farm is a much bigger company with higher revenues and market capitalisation
- Sheng Siong has higher profitability than Dairy Farm
- Sheng Siong has a stronger balance sheet than Dairy Farm
- Sheng Siong is much more efficient in their use of resources
- Dairy Farm has more expensive shares than Sheng Siong
So… Which Stock Should I Invest In?
If you’re interested, I have given a much more in-depth analysis of each of these stocks on the Seedly Q&A platform. Other users have also shared their views and perspectives, so it would be good to have a look at what other community members have to say before doing your own research and making your decision!
Dairy Farm Holdings Limited (SGX: D01)
Sheng Siong Group Limited (SGX: OV8)
