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Three Cheap Growth Shares?

Growth shares are named as such because of their high earnings and revenue growth rates (usually in figures that exceed the mid-teens). But, as these companies become more well-known in the market, investors have the tendency to bid up their shares to very high valuations.

Yet, there are some that tend to slip beneath the radar. While it’s not the most robust valuation tool around, the price-earnings-growth (PEG) ratio can be useful in pointing out potential investment opportunities in growth shares that do not happen to have captured the market’s attention.

I ran a screen for shares that met these three criteria: 1) a display of consistently growing earnings; 2) a compounded annualised growth rate for earnings in the mid-teens or higher starting from 2007 (I chose that time period to take into account unsustainably high growth rates that could possibly come about due to temporarily depressed earnings that stemmed from the global economic slowdown in 2008-2009) and; 3) having a PEG ratio smaller than 1.

Here’re three shares that filtered through:

1. Jardine Cycle & Carriage (SGX: C07)

The company, through its 50% ownership of Indonesian conglomerate Astra, has business interests in Indonesia and the Asian region that include automobile distribution, financial services, heavy equipment and mining, agribusiness, infrastructure and logistics, and information technology.

Jardine Cycle & Carriage has grown its earnings per share by a compounded annual rate of 17.4% since 2007 and has shown rather consistent growth in profits as shown below.

Year Earnings per share (US dollars)
2007 0.98
2008 1.27
2009 1.44
2010 2.65
2011 2.90
2012 2.77
2013 2.57
Compounded annualised growth rate 17.4%

Source: S&P Capital IQ

At its current price of S$43.28 per share, shares of the conglomerate are valued at 13 times trailing earnings, which gives it a historical PEG ratio of 0.75 (13 divided by 17.4).

2. Super Group (SGX: S10)

Super Group’s a maker of instant beverages like coffee and tea through brands that include Super Coffee, Super Charcoal Roasted White Coffee, OWL, Café Nova, and Tea Su Su among others. In addition, the company also manufactures for sale, food ingredients like non-dairy creamers and soluble coffee powders of both the freeze-dried and spray-dried variety.  

Super Group has grown its earnings at a really fast pace of 22% over its past six completed-financial years since 2007 and had only one down year (in 2008) when its earnings declined.

Year Earnings per share (Singapore cents)
2007 5.45
2008 4.64
2009 7.48
2010 10.7
2011 11.1
2012 14.2
2013 17.9
Compounded annualised growth rate 22.0%

Source: S&P Capital IQ

With a share price of S$3.50, the instant beverage maker carries a price-earnings ratio of 20, giving its shares a PEG ratio of 0.91, which is just a shade below 1.

3. First Resources (SGX: EB5)

With 170,596 hectares of oil palm plantation and 12 crude palm oil mills in Indonesia, First Resources is a bona fide palm oil producer listed in Singapore along with other industry peers like Indofood Agri Resources (SGX: 5JS), Bumitama Agri, and Golden Agri-Resources.

But while the afore-mentioned trio of First Resources’ fellow palm oil producers had seen their earnings in 2013 fall by more than a quarter each (in Indofood and Bumitama’s cases, earnings actually dropped by half), First Resources had only experienced a very slight decline in profits in the year. In fact, it has demonstrated a sterling compounded annual growth rate in earnings per share of some 23% since 2007.

Year Earnings per share (US cents)
2007 4.30
2008 6.75
2009 7.74
2010 9.84
2011 13.4
2012 15.3
2013 15.0
Compounded annualised growth rate 23.2%

Source: S&P Capital IQ

With its price-earnings ratio of 12.5 at its current share price of S$2.37, that translates into a historical PEG ratio of only 0.54.

Foolish Bottom Line

Currently, the Straits Times Index (SGX: ^STI) is valued at around 13 times earnings based on data from the index tracker, the SPDR Straits Times Index ETF. In light of that, growth shares like Jardine Cycle & Carriage and First Resources – with their low PEG ratios and PE ratios that are in-line with that of the market – might seem to be even greater bargains.

However, there’s a slight kink here investors have to be aware of. The PEG ratio I’ve used here is backwards looking – i.e., I’m using the historical growth rates the various companies have displayed. There’s no particularly strong insight given regarding how well the trio can continue growing their profits in the years ahead.

If their profits somehow fall off a cliff after a year or two, what seems like a particularly cheap growth share based on its PEG ratio might turn out to be an expensive mistake after all. That’s something to bear in mind when using valuation tools like the PEG ratio.

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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 writer Chong Ser Jing owns shares in Super Group.