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Sheng Siong Group Ltd (SGX:OV8) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, OV8 is currently valued at S$1.6b. I will take you through OV8’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
View our latest analysis for Sheng Siong Group
What is free cash flow?
Sheng Siong Group’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Sheng Siong Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Sheng Siong Group’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Sheng Siong Group’s yield of 2.41% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Sheng Siong Group but are not being adequately rewarded for doing so.
Is Sheng Siong Group’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at OV8’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 25%, ramping up from its current levels of S$82m to S$103m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, OV8’s operating cash flow growth is expected to decline from a rate of 19% next year, to 5.1% in the following year. But the overall future outlook seems buoyant if OV8 can maintain its levels of capital expenditure as well.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Sheng Siong Group becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Sheng Siong Group to get a better picture of the company by looking at: