Can This Growth Share Deliver On Its Promise?

Growth shares are called as such because they’ve been growing really quickly, and at the same time, appear to have great opportunities for further expansion.

But here’s the thing.

Such shares are often awarded high valuations in the market, and any missteps can have painful consequences for their shareholders. It’s for this reason that investors should think about a growth share’s ability to make full use of its opportunity.

A promising growth story

For a growth story in Singapore’s stock market, let’s turn to diamond planning and grading products maker Sarine Technologies Ltd (SGX: U77). Since its listing in April 2005, the company has seen its share price grow by 800% to S$2.62 currently.

Sarine Technologies’ top-line has grown at a compounded annual rate of 12.7% from US$30.3 million in 2005 to US$86.1 million over the 12 months ended 30 September 2014. Over the same duration, profits have expanded at an annualized clip of 13.2% to US$27.8 million.

Such growth has led to Sarine’s shares trading at a high trailing price to earnings (PE) ratio of 24.5. For perspective, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the market barometer the Straits Times Index (SGX: ^STI), is carrying a PE ratio of only 13.4.

The future opportunity

Sarine Technologies’ traditional products have always focused on the diamond manufacturers, the ones who turn rough diamonds into the polished gemstones we’re all familiar with.

But in recent months, the company has ramped up its efforts to enter a new market segment in the diamond industry, the retail trading of polished diamonds. And, it’s doing so through the introduction of two new products, Sarine Light and Sarine Loupe.

Here’s what the company has to say about them in its latest third quarter earnings release:

“New products such as Sarine LightTM, Sarine LoupeTM and similar services (as complementing bundles or standalone) address the wholesale and retail trade of polished diamonds – a significant new market segment that is expected to add to the Group’s recurring revenue base, with more significant revenue contribution in 2015.”

The chart below showcases the difference in size between the different parts of the diamond industry and also gives an idea of the opportunity at hand for the company:

Diamond industry

Source: Sarine Technologies’ analyst presentations

Taking the bull by the horns

So what we’ve seen so far with Sarine Technologies is that it’s exhibited fast top- and bottom-line growth; it has a high valuation; and it has some significant opportunities for further growth.

This brings us to the important question: Does it have the ability to make full use of its opportunity? Here are some clues that might help give us an answer:

  1. An innovative spirit: Starting from at least 2009, Sarine Technologies has been releasing multiple new products and services in each calendar year and that’s a sign that the company’s not standing still and is constantly thinking of new ways to innovate and bring even more value to its customers.
  2. A proven track record of dominating its market: According to Sarine Techologies’ analyst presentations, the company is larger than all its competitors combined given that it holds a “~70+%” market share of the diamond planning and grading products space.

These suggest that Sarine Technologies might just be able to conquer new opportunities that it sees.

At this point, it’s is important to point out that none of the above suggests that Sarine Technologies would definitely make for a good investment going forward. There are still other important considerations to factor in, such as the firm’s financial health and cash flow characteristics.

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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 Sarine Technologies Ltd.