When it comes to investing on SGX, many of us are ordinary individuals looking to put our money into stocks that we can be confident about over the long haul. We don’t have hours each day to look through the performance of the stocks that we have invested in, nor the Warren Buffett acumen in picking the right stocks.
In an article we wrote previously, we explain why we think it makes sense to invest in companies that we can see around us. The reason is simple. If you are already spending your money frequently at some of these consumer-facing companies, then it is likely that you would be more familiar with them.
The retail cluster on the SGX offers the best opportunity to invest in companies that you would frequently interact with. Across the 43 companies in the cluster, there are many recognisable brands that every Singaporean would know. These include companies such as Challenger, Courts, Isetan, Osim, FJ Benjamin and many others. In total, the retail cluster amounts to a $30 billion dollar industry.
If you are keen to invest in some of these retails stocks, we recommend that you read up more about the sector in this report issued by Frost & Sullivan.
We sum up what we have learnt about the sector through these 7 key details below.
# 1 Rental Cost
You do not have to be an investment genius to know that rental would naturally be one of the biggest cost factors that could determine the success or failure of a retail company in Singapore. Even megabrand like Takashimaya have gotten into legal disputes with its landlord Ngee Ann City over rent disagreement recently.
Rental rates for commercial space in Singapore have been increasing over the past decade, and are unlikely to be changing anytime soon.
You can easily look at how rental affects a company by looking at a company’s financial statement, and finding how much the company spends on rental, as a proportion to their overall sales revenue, gross profit and net profit.
For example, when we look at Courts, we see that the company spent $41.8 million on rental last year. This represents about 5.5% of their total revenue ($758 million), 17% of their gross profit ($249 million), and 2.4 times of their net profit ($17.3 million). With all things being equal, a 10% increase in rental would eat up about 25% of their net profit.
We look at another company, Challenger, which occupies less retail space in Singapore (since laptops naturally occupy less space than dining tables). The company spent $17 million on rental, which represents 4.8% of total revenue ($352 million), 24% of gross profit ($70 million), and 0.9 times of their net profit ($18.3 million). A 10 % increase in rental would eat up about 10% of net profit. Not as high as Courts’.
These numbers would tell us how affected a company would be when rental increases, and hence, the return on your investment.
# 2 Labour Cost
Labour is an issue in most Singapore companies. Labour is never cheap, whether you hire locally, or look overseas.
We look at Courts and identify that salaries totalled $72 million last year. That represents about 29% of the gross profit the company made. When you add that to rental, almost 50% of gross profit is deployed to meet rental and labour cost.
Most brick-and-mortar companies face similar situations in Singapore. As an investor, we need to know how much these costs represent as a percentage of total gross profit.
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# 3 Own Brand Vs. Distribution Brand
The rise of e-commerce has changed the retail landscape for many companies. Today, consumers can purchase products from fashion brands such as Banana Republic and Gap directly from the US, and bypass the physical outlets in Singapore operated by brand distributors like FJ Benjamin.
When a company owns a brand they operate, they have more control over it and that gives them a premium. For example, companies like Breadtalk, who are brand owners themselves, have an added advantage since the growth of their brand with the additional premium that no one can take away from them.
Another great example would be Coca-Cola. The company is valued heavily due to the extensive distribution network that they have across the world. Yet, a large part of the brand value is because the company also owns hundreds of brands such as Coca-Cola, Sprite and Minute Maid.
We are not saying that you always have to own the brands that you are operating. There are obviously billion dollar companies such as Zalora and Airbnb that have been successful in operating a great distribution channel. But it’s important to know what exactly you are investing your money into.
Is it a brand, a distribution network, or both?
# 4 Market Share and Size
In some sectors, market share and size can tell you a lot about the company(s) that you are investing into and their growth potential. Here is an example from the pawnbroking industry.
Based on the report issued by Frost and Sullivan, loan dispersed by the pawnbroking industry is currently $5.3 billion as at 2014, up from $1.8 billion in 2008. This is a staggering (and somewhat, unexpected) growth as the sector continues to gain social acceptance in Singapore.
A quick check on the 3 pawnbroking companies listed on the SGX showed that total revenue generated by the trio was about $507 million in 2014.
What we can see is that the industry is huge. And that even taking a slightly bigger market share would translate into an impressive revenue increase for the companies that are successful in doing so.
Of course, it is important to know if the market is growing bigger. There is no point in gaining more market share, if you are playing in a shrinking market. For the pawnbroking industry, with the impressive 19.4% per annum growth in loan dispersed since 2008, one can be relatively confident of growth within the sector.
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# 5 Online Brand Presence
Like it or not, brands and the companies that operate them need to start transiting their business into the online space. With the infrastructure and business network that some of these established companies already have in place, they already have an added advantage, but only if the companies successfully capitalise on the e-commerce space.
Companies like Challenger have already embraced the e-commerce challenge (pun intended) by setting up their own digital brand named “Hachi.tech”. As investors, we believe it is important to look at the digital strategy that a company has before investing into it.
Here is an interesting thought to ponder over. As of 2014, the e-commerce market is worth USD 900 million in Singapore. That represents (only) 0.9% of total retail sales.
Just imagine how big the market would be in Singapore if e-commerce just increases from 0.9% to about 2% over the next 5 years? We will be looking at a USD 2 billion industry.
# 6 Same-Store Sales Growth
For retail brands, it’s always easy to look good at the topline by increasing revenue through opening more stores. The maths is simple; more outlets tend to increase overall sales.
To give a more accurate picture of how the business is expanding, a commonly used metric is the “same-store sales growth (SSSG)” figure. We look at the sales performance of stores that have been operating for more than one year, and to look at their sales growth (or lack of) compared to previous years.
For example, Sheng Siong opened 5 new outlets in 2015 and saw a growth of 5.3% in revenue. Of that, 4.6% was attributed to the new outlets with the remaining 0.7% attributed to existing stores. In other words, SSSG was at 0.7%.
When we take a look at the SSSG numbers for Sheng Siong, we like the growth the company is enjoying. It is expanding its overall sales by having more stores. Yet, the opening of these new stores are not cannibalising the sales from existing stores, which is also increasing.
# 7 Macroeconomic Factors
When it comes to companies in certain sector, macroeconomic factors having an effect is unavoidable. Some companies are affected more than others.
For example, when GDP goes up and unemployment rate in the country is low, people tend to spend more on luxury items. In such times, automotive companies such as Jardine Cycle & Carriage or Jewellery brands would perform well.
On the other hand, when the economy slows down, it is everyday necessities companies such as Sheng Siong that would retain its financial performance. This is very logical. Even when times are tough, you will still be visiting the supermarket for your groceries.
Do Your Own Research Before Investing
The 7 key details we highlight could apply to stocks outside of the retail cluster. However, they are particularly important if you are looking to invest in retail companies.
If you are interested to get a summary of the 43 SGX-listed companies under the retail sector and the opportunities and threats that these companies face, you can find out more from this independent report by Frost & Sullivan.
This article was written in collaboration with SGX. To stay up to date with the latest news on Singapore stocks, you can like the SGX My Gateway Facebook Page. All views expressed in this article are the independent opinion of DollarsAndSense.sg