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Would Peter Lynch Buy Fragrance Group?

fragrance group logoPeter Lynch once said that there is no correlation between the success of a company’s operations and the success of its stock price over a few months or a few years. But in the long term, there is a 100% correlation.

Those sage words could almost have been written about hotel and property developer Fragrance Group (SGX: F31). Over the last nine years, shares in the company have increased from less than $0.01 to S$0.22, as profits grew from S$14m to S$214m.

But does Fragrance Group have what it takes to become a “Peter Lynch” stock?

Peter Lynch likes to look for companies whose valuations are below their historical average. Currently, Fragrance Group is valued at around seven times earnings. This is below its historical valuation, which tends to be in the mid-teens.

Meanwhile, earnings at the property-cum-hotel outfit have grown at around 40% a year. This, together with its PE ratio, would equate to a Price-to-Earnings Growth (PEG) ratio of around 0.2. That is quite low, and probably low enough to catch the eye of Peter Lynch.

However, the company has as much debt on its balance as it has equity. Its debt to equity ratio is almost 100%. Meanwhile, with cash in hand of just S$137m, Fragrance Group is carrying net debt rather than net cash.

On its own, that is unlikely to rule it out as a Peter Lynch stock. However, its short dividend payment history might. Peter Lynch like to see a business with a consistent track record of dividend payments. Fragrance Group only started paying a dividend last year.

Fragrance Group is unquestionably an ambitious company. It has come a long way from its days as a budget hotel operator in Geylang. However Peter Lynch might wait a few more years before making a decision on the business.

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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.