In investing terms, a “sturdy” share for me is one that has a rock-solid balance sheet which is flush with cash and has little or no debt. A strong balance sheet can go a long way in helping a company tide over rough economic climates and can even provide firepower for a company to make value-accretive acquisitions when other competitors are floundering under the stresses of a heavily-leveraged balance sheet. But that said, having just a great balance sheet alone would not make a company’s shares a good investment. The company would have to display growth in its…
In investing terms, a “sturdy” share for me is one that has a rock-solid balance sheet which is flush with cash and has little or no debt. A strong balance sheet can go a long way in helping a company tide over rough economic climates and can even provide firepower for a company to make value-accretive acquisitions when other competitors are floundering under the stresses of a heavily-leveraged balance sheet.
But that said, having just a great balance sheet alone would not make a company’s shares a good investment. The company would have to display growth in its business as well because that’s how a business’s intrinsic value can grow over time.
The following three shares are ones that have managed to grow over time while having very strong balance sheets.
1. ARA Asset Management (SGX: D1R)
ARA Asset Management’s main bread and butter lies in the management of publicly-listed real estate investment trusts, private real estate funds, and various properties. Some of the locally-listed REITs under its care include Cache Logistics Trust, Fortune REIT, and Suntec REIT. The company also manages Hong Kong-listed Prosperity REIT and Hui Xian REIT, and the Malaysia-listed AmFIRST REIT.
Given its business model, one of the key drivers of ARA Asset Management’s corporate performance would be the amount of assets under its management. On that front, the company has shown remarkable growth: Assets under management (AUM) has grown from S$9.5 billion as of the end of 2007 (the year it got listed), to S$25.4 billion as of 31 March 2014.
ARA Asset Management’s chief executive, John Lim, has publicly stated his goal of achieving an AUM of US$40 billion by 2016. That’s a lofty target to aim for – if investors believe in Lim’s determination to succeed, it would represent some serious runway for future growth for the company.
Shares of the company are trading at S$1.70 currently, giving it a price-to-AUM-per-share ratio of 5.6%.
2. Vicom (SGX: V01)
Vicom’s business is based predominantly in Singapore and it has two main business segments: 1) Vehicle inspection and testing; and 2) Commercial testing and inspection services. Under the first segment, Vicom probably has dominant market share given that Singapore has only nine such centres with the company running seven of them.
Vicom’s second business segment is housed under its Setsco subsidiary which the company had acquired back in 2003 for S$15.7 million. Setsco provides “a comprehensive range of testing, calibration, inspection, certification, consultancy and training services to key markets such as Oil & Gas, Aerospace, Marine, Food, Electronics, Environmental, Construction, and Building & Facilities.”
Management at Vicom has been shown to be adept at growing Setsco’s business despite stiff competition. In 2003, Setsco earned annual revenue of S$22.8 million and the company was a dwarf compared to industry peers like SGS SA and Bureau Veritas; the two companies had annual revenues of S$3.37 billion and S$2.75 billion, respectively, in 2003. By 2010, Setsco’s annual revenue had grown to S$51.4 million (Vicom stopped reporting segmental results after that year). Setsco’s profitability meanwhile, grew even faster as its operating profit increased from S$1.5 million in 2003 to S$9.8 million in 2010. There’s no signs of a slowdown either with management commenting in the company’s latest first quarter results that “the non-vehicle testing business [referring to Setsco] is expected to grow despite the keen competition.”
Vicom’s shares are valued at 20.5 times trailing earnings at its current price of S$6.71.
3. Super Group (SGX: S10)
Super Group also has two main business segments: Branded Consumer Products and Food Ingredients.
Under the first segment, the company sells instant coffee, tea, and cereals, amongst other products. The company’s stronger brands in the segment include Super and Owl. Between 2008 and 2013, sales from the segment have grown steadily to S$364.5 million at a compounded annual growth rate of 6.6%. Part of the company’s ability to grow consistently here would likely be due to its innovative spirit in launching one new product every 2 months on average.
Meanwhile, the Food Ingredients segment sees Super Group selling products like non-dairy creamer and soluble coffee powder to third party beverage manufacturers. The segment has grown at a breakneck pace – sales of S$34.9 million in 2008 had increased by 452% to S$192.5 million in 2013 – and part of that could be due to the company’s ability to customise its food ingredients according to its clients’ specifications. That’s an ability that’s rare amongst Super Group’s competitors in the food ingredients space in the region and helps elevate the company’s products above the category of being a mere commodity.
With its shares priced at S$1.48 each, Super Group is currently valued at 17 times its trailing earnings.
Foolish Bottom Line
The three companies’ solid corporate performance has not gone unnoticed in the market. For instance, since the start of 2008, ARA Asset Management’s shares have gained some 151% even though the Straits Times Index (SGX: ^STI) is still sitting on a 5.6% loss at its current level of 3,288 points. With Vicom and Super Group, shares of both have jumped by 689% and 659% respectively since the start of 2004; in comparison, the Straits Times Index is up by only 86%.
But, that was then and this is now. Can those three companies’ futures be as bright as their pasts? That would be up to you to judge.
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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.