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Super Group’s Stale Cup of Coffee?

Ser Jing - Super Group First Quarter Results, Strong Brew of Profit (pic)

Shares of instant-beverage manufacturer Super Group  (SGX: S10) has gained more than 120% in the last twelve months, so that’s a reason to cheer for its shareholders. But, at $4.59 on Wednesday afternoon, it’s almost 7% off its 52-week high of $4.92 that it hit barely 3 weeks ago.

Super’s shares hit the high of $4.92 after the release of its first quarter results which saw quarterly profit jump by 25% from a year ago to S$22.1m. So, it seems the market was pleased with what it saw from the company and pegged Super to be worth S$2.74b as a whole at $4.92 a share.

But, why is the entire company now only valued at S$2.56b at $4.59 a share? That’s a cool $180m haircut, so it’s not exactly a trivial amount.

The likely truth is, there’s nothing to it. Share prices rise and fall in the short-term. It’s natural, it’s normal and it’s just what share prices do.

Instead of thinking about what could have caused the 7% decline in Super’s share price, investors could perhaps spend time thinking if the company can sustain or even improve upon its 27% growth in earnings-per-share that it delivered last year.

That kind of strong growth would have gone a long way in pushing up the Price-Earnings ratio of the company’s shares from 11.8 on May 2010 to its current PE of 30.7. With a PE almost twice that of the Straits Times Index’s (SGX: ^STI) PE of 15.5 (as of 31 May 2013), Super’s shares are certainly priced for growth.

And, at heightened PEs, the company’s shares might be due for some volatility if there are any mis-steps in its growth-path along the way. But, volatility and investing risks aren’t the same thing.

The better way to judge whether Super’s a risky investment – i.e. if its shares are too expensive such that it will cause a permanent loss of capital by paying for pipedreams of growth – is to think about whether its profits can sustain the heady momentum in growth.

Can its Ingredients Sales division, the main contributor of the company’s growth, continue growing at a clip of 30% or higher as it has done since 2010? Will its instant coffee run out of steam with consumers in Asia?

These are the kind of questions I’ll be pondering about whenever Super Group’s share prices fall, instead of spending brain-juice on the exact causes of a short-term decline (if there even exists any, in the first place). What will you do the next time Super’s share price falls?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.