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An Easy Reference for Yoma Strategic’s Future Share Price

YomaYoma Strategic (SGX: Z59) has been a high-flyer in the local share market. Over the past 12 months, it has risen by 141%, soundly trumping the Straits Times Index’s (SGX: ^STI) relatively anaemic 7.7% return.

The growth in its share price has come alongside explosive earnings growth of 416% to S$14.4m over the last two years.

The company has substantial business interests in Myanmar in the form of real estate, agriculture, and automobile dealership activities. It has benefitted widely from its exposure to the fast-growing South-East Asian country, which has opened its doors to foreign investments in recent years.

In the share market, there are some shares that track earnings growth nicely and get pegged with an earnings-multiple (also known as the PE ratio) that goes largely unchanged over the years. Meanwhile, there are shares whose prospects becomes more and more favoured by the market and the new-found favour manifests itself in the form of an expanding PE ratio.

In the case of Yoma, it’s likely to be the latter given how its trailing PE ratio has expanded from less than 40 in July to 63 currently. Such a high price-tag on its shares in relation to historical earnings naturally brings with it the burden of increased expectations of future growth.

But, all this is just history. What is important to most investors is, I believe, the question of how Yoma will perform in future.

My Foolish colleague over in the USA, Morgan Housel, recently shared an excellent table on the expected returns for American investment-holding company, Berkshire Hathaway.

I thought the table was instructive for use on most kinds of shares as a guide for future returns for investors. So, I constructed a similar table showing different assumptions for Yoma’s future earnings growth rates and PE ratios to come up with a whole range of plausible prices for the company five years out.

This is what I got:

YomaPEChart

As mentioned earlier, Yoma currently has a PE ratio of 63 at the share price of $0.915. For investors to double their money or more in five years, they will have to see Yoma achieve a growth-rate figure and/or get pegged with an earnings-multiple that’s within the cells enclosed by the red-border.

I’ve raised questions about the sources of Yoma’s reported-earnings growth previously, though investors are of course free to pick and choose any scenario they want from the table above to use as a guide for the future.

But ultimately, the question regarding returns is this: How reasonable are your assumptions – and how confident are you in those assumptions- in regard to Yoma’s EPS growth, as well as the premium that investors are willing to pay for each dollar of the company’s earnings?

Besides underlying corporate performance, valuations of shares do matter in determining future returns. Investors should bear that in mind.

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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.