Investing in the shares of fast-growing companies might not be for everybody as these shares generally carry high valuations, leading to a more volatile experience for their investors. But, the rewards can be tremendous if the right shares are picked. How should the selection be made though? For that, we can turn to the advice of venture capitalist Mark Bailey. He once said at a Motley Fool event last year that the total addressable market of a company (in other words, a firm’s market opportunity) is of utmost importance when it comes to picking the next high-flying growth star. Bailey’s…
Investing in the shares of fast-growing companies might not be for everybody as these shares generally carry high valuations, leading to a more volatile experience for their investors. But, the rewards can be tremendous if the right shares are picked.
How should the selection be made though? For that, we can turn to the advice of venture capitalist Mark Bailey. He once said at a Motley Fool event last year that the total addressable market of a company (in other words, a firm’s market opportunity) is of utmost importance when it comes to picking the next high-flying growth star.
Bailey’s an executive at Draper Fisher Jurvetson, a venture capital firm which has given early backing to some of America’s best growth stories over the past decade like Baidu and Tesla. So, his words are well worth heeding
Keeping Bailey’s advice in mind, what are some local companies with huge market opportunities in relation to their current size? For me, the following three companies come to mind: Raffles Medical Group Ltd (SGX: R01), Neo Group Ltd (SGX: 5UJ), and Sarine Technologies Ltd (SGX: U77).
The healthcare provider
Healthcare services provider Raffles Medical’s flagship Raffles Hospital accounted for 63% of the company’s total revenue of S$341 million in 2013. With more than one-third of the hospital’s patients being foreigners, foreign patients would have thus given Raffles Medical around S$70 million in revenue in 2013.
Analyst reports had pegged medical tourism spending in Singapore to be around S$1.1 billion in 2013. With research outfit Frost & Sullivan looking for medical tourism spending to grow by 13% per year from 2014 to 2020, the opportunity for Raffles Medical seems huge if that spending growth does come to pass.
Besides Raffles Medical’s market opportunity with foreign patients, Singapore’s greying and growing population would also logically give rise to an increased need for healthcare services here. This bodes well for the firm’s addressable market.
The fast-growing food caterer
Events-catering outfit Neo Group was listed back in 11 July 2012. Back then, in its IPO prospectus, research outfit Euromonitor had estimated Singapore’s events-catering market to be around S$307 million in size in 2011. Euromonitor also forecasted then that the market would grow by 12.9% per year from 2012 to 2014.
With Neo Group’s sales from catering taking up around three-quarters of its total revenue of S$52.4 million for the financial year ended 31 January 2014, there’s ample future opportunity for the company to tackle even if Singapore’s events-catering market had stagnated from 2011 onward.
All that bling-bling
Sarine Technologies’ business has traditionally been about supplying diamond manufacturers (the ones who turn rough diamonds into the polished gemstones you see in jewellery shops) with technologies and gadgets which help them to dramatically improve the efficiency and quality of their operations. But in recent years, the company has been intensifying its efforts to crack into another part of the diamond industry value chain – the retail and wholesale trading of polished diamonds.
Sarine Technologies intends to do so through the introduction of its new products, namely Sarine Light and Sarine Loupe. The former helps produce objective reports on certain aesthetic qualities of polished diamonds which are prized by consumers while the latter enables diamond traders to view virtual images of polished diamonds with nearly the same level of detail and clarity as though they were looking at the physical stone itself with a traditional loupe. In particular, the company’s aim with Sarine Loupe is to help reduce friction in the trading of polished diamonds.
The company has already begun its marketing efforts for both products. In Sarine Technologies’ latest quarterly earnings release, the firm commented that both products would help “address the wholesale and retail trade of polished diamonds – a significant new market segment that is expected to add to [Sarine Technologies’] recurring revenue base, with more significant revenue contribution in 2015.”
Source: Sarine Technologies’ analyst presentations
The chart above showcases the total dollar value of each segment of the diamond industry value chain. Although it’s not entirely representative of the actual market opportunity for Sarine Technologies, it does give an indication of the outsized potential that the retail segment of the diamond industry value chain has in relation to other parts of the company’s business.
Over the past five years, the trio has been growing really quickly, as seen from the chart below (click for a larger image), which plots out how their sales and profits have increased over the years. This corporate growth has enabled the trio to post market-beating returns.
Source: S&P Capital IQ
From the start of 2010 to 6 Jan 2014, Raffles Medical and Sarine Technologies have posted capital gains of 170% and 832%, respectively. In contrast, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI), has gained just 14% in the same period.
As for Neo Group, its shares have jumped by 197% from its listing price of S$0.30 per share; the STI ETF has inched up by just 11% over the same timeframe.
For the most part, the three companies have also not relied too heavily on borrowings to finance their growth. From 2010 to today, both Raffles Medical and Sarine Technologies have carried more cash than debt on their balance sheets. Neo Group is something of an exception here as it has more debt than cash currently. But even so, it has still kept its net-debt to equity ratio at a manageable level of near 50%.
A Fool’s take
Given the trio’s addressable market, track record of growth, and their strong balance sheets, they might fairly be called rock-solid growth shares.
At this point, it’s crucial to point out that none of all the above is meant to suggest that these shares will definitely make for great investments going forward. There are still important risks to consider, and investors would also have to dig deeper to get a better grasp of these companies’ ability to make full use of the market opportunities they have.
But with that said, what Raffles Medical, Neo Group, and Sarine Technologies has achieved thus far would make them worthwhile candidates for further study for the intrepid investor who’s out looking for rock-solid growth shares to start 2015 with.
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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 Raffles Medical Group, Neo Group, and Sarine Technologies.