Is There More Room to Grow for This Explosive Little Growth Stock?

Events caterer and food & beverage (F&B) retail outfit Neo Group Ltd (SGX: 5UJ) has been growing its business impressively in recent years.

From annual sales of S$30 million in the year ended 31 January 2011 (FY2011), Neo Group has since clocked revenue of S$57.3 million over the 12 months ended 31 July 2014, representing a compounded top-line growth rate of 22.4% per year.

The market has taken notice of Neo Group’s growth, judging by how the caterer’s shares have gained more than 200% since the firm’s listing on July 2012 and how those shares carry a high price-to-earnings (PE) ratio of 22 at their current price of S$0.945.

In contrast, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which closely tracks the fundamentals of the market barometer the Straits Times Index (SGX: ^STI), has a PE ratio of just 14 at the moment.

But while Neo Group, which still has a tiny market capitalisation of S$136 million currently, has been growing really quickly in the past, can that continue? This is an important question to think about as expensive growth shares can turn out to be massively disappointing investments if their future growth fails to materialise.

With Neo Group, there’s reason to believe that there’s more room for further expansion.

On Tuesday, Neo Group announced that a study conducted by research outfit Euromonitor International revealed that the caterer had the biggest market-share of Singapore’s S$363 million events catering market in 2013.

But while Neo Group was the largest player in the events catering space, the company only managed to capture just 10% of the market – and therein lies its opportunity for growth.

Successful venture capitalist Mark Bailey thinks that a company’s total addressable market (TAM), or market opportunity, is one of the most important metrics an investor can use when finding the next growth superstars of tomorrow. With just 10% of a S$363 million market, Neo Group clearly has a huge runway in front of it.

Of course, this does not necessarily mean that Neo Group would definitely continue growing – we would still need to observe if the firm has the ability to make use of that market opportunity.

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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 Neo Group Ltd.