Instant beverage maker Super Group Ltd (SGX: S10) has delivered some mighty returns for its investors over the years. From a base of S$0.195 at the start of 2004, Super Group’s shares have since jumped by 664% to S$1.49 today. When compared with the Straits Times Index’s (SGX: ^STI) return of just 99% over the same timeframe, Super Group’s gains look all the more impressive. But, that’s all in the past. Can Super Group continue to deliver market-smashing returns going forward? A key part to the answer lies in the quality of the company’s business, keeping in mind the idea…
Instant beverage maker Super Group Ltd (SGX: S10) has delivered some mighty returns for its investors over the years.
From a base of S$0.195 at the start of 2004, Super Group’s shares have since jumped by 664% to S$1.49 today. When compared with the Straits Times Index’s (SGX: ^STI) return of just 99% over the same timeframe, Super Group’s gains look all the more impressive.
But, that’s all in the past. Can Super Group continue to deliver market-smashing returns going forward? A key part to the answer lies in the quality of the company’s business, keeping in mind the idea that it’s a share’s business performance which drives its price over the long-term.
A quick way to judge the quality of Super Group’s business can come from investor and author Pat Dorsey. In his book, The Five Rules for Successful Stock Investing, Dorsey had shared a checklist with nine criteria that was designed to help sift out companies that are worthy of a deeper study by investors.
The nine points are given below:
- The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has a market capitalisation that isn’t too small.
- It has consistently earned an operating profit.
- It has generated consistent operating cashflow.
- The firm earns a good return on equity.
- It has been able to grow its earnings consistently.
- It possess a clean balance sheet.
- The firm can generate lots of free cash flow.
- There are infrequent appearances of one-time charges.
- There has not been major dilution of shareholders’ stakes in the firm.
Companies that are able to get a tick in most of the boxes would likely be good businesses. For a deeper look as to why the checklist makes sense in the context of finding a quality company, you can check out my colleague Chin Hui Leong’s work. Here they are: Part 1, Part 2, and Part 3.
With that, let’s put Super Group through the test.
Testing its mettle
For a brief introduction, Super Group’s bread and butter resides in the manufacture and sale of branded instant beverages (like coffee and tea) as well as the ingredients (like non-dairy creamer) which go into the making of various types of foods and beverages.
The company, having been listed since 1994, has a long history as a publicly-listed entity. Together with a market capitalisation of S$1.67 billion and the presence of quarterly earnings releases, Super Group has ticked the first box on Dorsey’s checklist.
In the chart below (Chart 1), you can see that Super Group has managed to generate consistent operating income, net income, and operating cash flow over the period stretching from 2004 to 2014. It’s also worth noting that all three metrics have managed to display a strong upward bias. The free cash flow metric though, is where Super Group has hit a snag – it has been erratic over the timeframe under study.
With that, Super Group would deserve a nod for criteria 2, 3, and 5. Criterion 7 would unfortunately have to be a “No.”
Source: S&P Capital IQ
The next chart (Chart 2) deals with Super Group’s returns on equity and balance sheet strength over the same timeframe as above. We can note that the company has been generating a strong average return on equity of 16% over the 10 years under study; what’s more, it has also been able to achieve that with a solid balance sheet that has had more cash than debt for the most part.
Given what we’ve seen, Super Group has certainly scored well for criteria 4 and 6 too.
Source: S&P Capital IQ
Moving on, we come to criterion 8 and that’s where Super Group has done well too – the firm has hardly logged any significant “one-time” charges over the past decade.
Source: S&P Capital IQ
The chart we see above (Chart 3) plots the changes in Super Group’s number of outstanding shares over the years. As you can probably tell, significant dilution hasn’t occurred at all given that Super Group’s share count has crawled upwards by just 1.2% per year on average from 2004 to 2014.
A Fool’s take… and we have a winner
Super Group has aced nearly all of Dorsey’s nine criteria (save for the lack of free cash flow). That may be a sign that the firm does indeed possess a quality business and can thus stand a chance of being able to continue delivering great returns for investors.
But that being said, more work definitely needs to be done beyond this before any investing decision can be made. The strength of a firm’s business is just one piece of the puzzle – there are other very important factors (such as the company’s future prospects and its valuation) to consider too.
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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.