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One Consistent Growth Share

While history is not a definite predictor of the future, it does help provide vital information that can assist investors in appraising the prospects of a company going forward.

In light of that, companies that manage to grow through both booms and busts can provide fertile hunting grounds for potentially delightful investments; the ability to grow in all sorts of economic climates might suggest that such companies have durable businesses that can withstand the test of time and reward shareholders over the long-term.

One company that has managed to grow both its top- and bottom-line consistently – even through the Great Financial Crisis of 2007-2009 – would be Mencast Holdings (SGX: 5NF).

At its current share price of S$0.61, the company has a tiny market capitalisation of only S$185 million. Its bread and butter is the provision of maintenance, repair, and overhaul (MRO) services for the global offshore, marine, and oil & gas industries. Currently, it operates under three business segments, namely Offshore & Engineering, Marine, and Energy Services.

Under the first segment, Mencast Holdings provides inspection, maintenance, and fabrication of offshore structures as well as engineering and other services related to onshore structures. In addition, this particular segment is also “recognised as engineering specialists in the design, procurement, fabrication and installation of structural and precision engineering systems and plants.”

With the Marine segment, the company’s engaged in “sterngear manufacturing, ship inspection, repair & maintenance services, engineering & fabrication, and marine project management works.”

Lastly, the Energy Services segment is where Mencast Holdings provides “custom-designed environmental and energy solutions with the use of high-technology and mobile decontaminating plants.” As part of this segment’s work, the company also helps their clients achieve more environmentally-friend practices by managing their carbon output.

Since 2005 (the earliest year in which financials of the company are available), Mencast Holdings has managed to grow its revenue and profits in every single year.

Year

Revenue (S$, million)

Profit (S$, million)

2005

11.7

0.7

2006

13.3

2.2

2007

18.9

4.8

2008

25.1

5.8

2009

26.3

7.0

2010

32.0

8.5

2011

56.4

10.2

2012

84.1

13.2

2013

99.2

15.7

Source: S&P Capital IQ

Such consistent growth has helped Mencast Holdings’ shares beat the market convincingly since its listing six years ago on June 2008 at a split-adjusted offer price of S$0.224 each; based on its current price, that’s a 170% gain. In comparison, the broader market, as represented by the Straits Times Index (SGX: ^STI), has increased by only 8% to 3,229 points in the same period.

But while the company has displayed solid revenue and profit growth so far, it has done so by taking on considerably larger financial risks. For instance, Mencast Holding’s net debt – total debt minus total cash & short-term investments – has ballooned from a negative S$5.5 million in 2008 (the company had more cash than debt at that time) to S$84 million in 2013. With debt increasing by a huge amount, investors might want to keep an eye out on the company’s finances to ensure it’s not over-stretching itself in pursuit of growth.

At its current price, Mencast Holdings is valued at only 11 times its trailing earnings. Given the Straits Times Index’s own price/earnings (PE) ratio of 14, Mencast Holdings’ valuation does seem low, especially when juxtaposed against its historical growth. But as it is, it seems the market’s not too well enamoured with the company’s future prospects and could also be spooked off by the risks associated with a highly-levered balance sheet (Mencast Holdings has a net debt to equity ratio of 79%).

The low valuations that Mencast Holdings’ shares have at the moment could well help set the stage for marketing-beating returns going forward (bearing in mind that Mencast Holdings’ trailing PE ratio of just 7 when it got listed would have play a part in its huge gains so far). But, that’s predicated upon the assumptions – and those are huge assumptions for anyone to make – that the company can continue growing as it did in the past while deftly managing the amount of leverage on its balance sheet.

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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 doesn’t own shares in any companies mentioned.