Would Peter Lynch Buy Super Group?

Ser Jing - Super Group First Quarter Results, Strong Brew of Profit (pic)Peter Lynch likes simple businesses. And what could be easier to understand than the manufacture and distribution of food and beverage.

Apart from Super Group’s simplicity that might attract Lynch’s attention, the company’s total return might catch his interest too. Over the last ten years the maker of instant beverages has delivered a total annual return of around 25%. That is not too dissimilar to Lynch’s own track record of 29% a year.

Identifying fast-growing companies is Peter Lynch’s forte. He looked for companies that could grow profits at over 15% a year. Super Group fits the bill. Between 2003 and 2013, profits have grown from S$13m to S$103m, which equates to an annualised growth rate of 23%.

However, whilst growth might be paramount, Lynch is not keen on paying too much for it. Consequently, he pays close attention to the PEG ratio, which relates a company’s valuation (PE) to its earnings growth. A PEG ratio of less than one is considered attractive. Currently, Super Group is valued at 21 times forward earnings, which together with an earnings growth rate of 23%, would put its PEG ratio at 0.9.

In terms of leverage or gearing, Super Group is not heavily reliant on borrowings. Its Leverage Ratio of 1.2 is below the average for Singapore companies. In fact, the company is sitting on a cash pile of around S$100m.

Other attributes that Lynch would look at would be dividends and the payout ratio. Last year, Super Group paid out S$0.09 per share, which translates to a historic yield of 2.6% at the current share price of S$3.53. The payout ratio was 40%. Based on the company’s Return on Equity of 20%, it would suggest that Super Group could sustain a growth rate of around12%.

Super Group bears many of the hallmarks of a typical Peter Lynch stock. As to whether he would buy the shares in the S$2 billion instant coffee maker, I’m surprised if it isn’t already on his radar.

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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 Director David Kuo doesn’t own shares in any companies mentioned.