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Three Shares That Are Built To Last

In the share market, there are many roads that lead to Rome. Some investors like to invest in businesses that are on the cusp of a turnaround, while some would prefer to invest in shares that are trading at dirt-cheap valuations.

And then, there are also those who would have a deep appreciation for shares that have businesses that are built to last. For the latter group, the relatively recent 2007-09 Great Financial Crisis would have proved to be useful in sieving out potential investments.

The crisis back then was a painful – albeit short – episode with the Straits Times Index (SGX: ^STI) reflecting plenty of that economic malaise: From a peak of 3,876 points in Oct 2007, the index fell by close to two-thirds to its trough of 1,457 points in March 2009.

Both within and outside the index, many businesses were not exactly having the best of times as they saw both sales and profits drop. But yet, there were some companies that had managed to defy the odds and grow throughout the crisis (and beyond).

The database I have access to has detailed financial information on 753 Singapore-listed companies. I did a quick screen on that list for companies that had managed to grow their earnings per share in each consecutive year between 2006 and 2013 and only a small handful had emerged.

Before I share more about the companies that had passed through the screen, here’s a quick tangential point about my choice of using earnings per share as my screening parameter instead of net income. Earnings per share is easily calculated by dividing a company’s net income with the number of outstanding shares. But, there is an important distinction between the two figures when looking at a company’s growth.

A company might well grow net income without benefitting shareholders at all if it constantly dilutes existing shareholders by raising funds through the issuance of new shares. As such, the change in earnings per share is perhaps a better way of gauging how a company has helped to build value for its shareholders.

With my digression done, let’s come back to the companies. Here are three shares (in no particular order) that had managed to grow their earnings per share consistently since 2006.

1. Vicom (SGX: V01)

Year

Earnings per share
(Singapore cents)

Year-on-year % change

2006

12.3

2007

15.9 29%

2008

18.6 17%

2009

23.4 26%
2010 25.8

10%

2011 28.7

11%

2012 30.0

4.5%

2013 32.2

7.3%

Source: S&P Capital IQ

Vicom’s a company that might be familiar with drivers all over Singapore. In our country, depending on the type and purpose, vehicles have to be inspected on a regular schedule in inspection centres. As it turns out, Vicom runs seven out of a total of nine such vehicle-inspection centres found in Singapore.

But that’s not all that the company does. At last count in 2010 (Vicom has ceased providing a segmental breakdown of its revenue and profit sources starting from 2011), vehicle inspection activities provided roughly one-third of Vicom’s overall revenue while the remaining share of the pie’s accounted for by the company’s subsidiary, SETSCO. In terms of profit, the relationship’s reversed with the vehicle inspection business providing approximately two-thirds of the company’s overall earnings while SETSCO makes up the rest.

In any case, SETSCO’s services include “quality assurance testing and evaluation of building materials, structural and chemical analysis, food and microbiological analysis, environmental monitoring, amongst others.”

At its current share price of S$5.90, Vicom’s selling for 18 times its trailing earnings and carries a historical dividend yield of 3.8% based on its annual pay-out for 2013.

2. Kingsmen Creatives (SGX: 5MZ)

Year

Earnings per share
(Singapore cents)
Year-on-year % change

2006

3.26

2007

5.29 62%

2008

7.46 41%

2009

7.87 5.5%
2010 7.93

0.8%

2011 8.56

7.9%

2012

8.84

3.3%

2013 9.21

4.2%

Source: S&P Capital IQ

Kingsmen Creatives’ main bread-and-butter is to help design, manufacture, and put-in-place installations for retail stores, corporate offices, restaurants, exhibitions, theme parks, and museums. Some high-profile clients that Kingsmen Creatives has worked with include Kenzo, Hugo Boss, The Soup Spoon and Universal Studios Singapore, amongst others.

There’s also another part of the company’s business that’s known as Alternative Marketing. Kingsmen Creatives’ activities under the segment mainly revolve around creative and novel marketing strategies that help to promote awareness and enhance the image of its clients’ brands. This particular segment is still really small, but has been growing very quickly. In Kingsmen’s latest first quarter earnings, the Alternative Marketing segment grew its quarterly revenue by 236% year-on-year to S$3.04 million, accounting for just over 5% of the company’s overall revenue of S$54 million for the quarter.

With more than 70% of Kingsmen Creatives’ clients returning to it for its services, that has surely helped drive the company’s steady earnings growth through the years. The company’s shares last traded at S$0.93 each, representing a trailing price-earnings ratio and dividend yield of 11 and 4.3% respectively.

3. BreadTalk Group Holdings (SGX: 5DA)

Year

Earnings per share
(Singapore cents)
Year-on-year % change

2006

1.44

2007

2.69 87%

2008

2.76 2.6%

2009

3.95 43%
2010 4.00

1.3%

2011 4.12

3.0%

2012 4.27

3.6%

2013 4.83

13.1%

Source: S&P Capital IQ

Rounding up the trio’s the food & beverage outfit, Breadtalk Group Holdings. The company’s F&B retail brands include its popular namesake bakery outlets Breadtalk Group as well as the award-winning Chinese cuisine restaurant, Din Tai Fung. In addition, hearty local hawker fare is also available at its Food Republic and Toastbox stores.

Those are just some of the nine brands that Breadtalk Group has under its banner. The company has geographically-diverse operations with more than 800 outlets in 15 territories that include Singapore, China, Hong Kong, and the Middle East.

In particular, the company’s rapid expansion in China – the number of bakery outlets in the country had doubled from 184 in 2010 to 365 in 2013, for instance – has been one of its key growth drivers.

Currently, Breadtalk has an audacious goal of hitting S$1 billion in sales by 2016 and having 2,000 stores by 2018. By way of comparison, as of March 2014, the company has 835 F&B retail outlets and annual sales of S$557 million. With such heady targets and growth prospects, shares of Breadtalk don’t come cheap. At a price of S$1.32, the company’s valued at 27 trailing earnings with a historical yield of only 1.4%.

Foolish Bottom Line

Since the start of 2006, shares of Vicom, Kingsmen Creatives and Breadtalk have gained some 534%, 896%, and 589% respectively. In comparison, the Straits Times Index had returned just 40%.

The three shares have been solid market beaters due to their consistent corporate growth. While their past performances – referring to both their share price gains and profit increases – are not perfect predictors of their future, their experience does contain a useful lesson for investors: Businesses that are built to last with the ability to withstand (or even continue thriving in) difficult economic environments  can often make for wonderful long-term investments.

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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 Kingsmen Creatives.