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The Stronger Investment Now: Super Group Ltd vs. Food Empire Holdings Limited

There are really only two companies in Singapore’s stock market that deal with instant beverages such as coffee and tea and they are Super Group Ltd (SGX: S10) and Food Empire Holdings Limited (SGX: F03).

Over the past five years, shares of the two companies have taken very different paths. Whereas Super Group’s shares have gone on to gain 77% in value to a price of S$1.09 each at the moment, Food Empire’s shares, at their current price of S$0.275 apiece, have lost 42% of theirs.

Given that Food Empire’s near a five-year low now while Super Group clearly isn’t, individual investors who would like their portfolios to have exposure to consumer companies might ask: Which of the two may be the better long-term investment right now?

It’s not an easy question to answer, but we can perhaps glean some clues by looking at a few important aspects of their business fundamentals such as their financial strength, track record of growth, and valuation. Remember, it’s the performance of a company’s business that is the main driver of its stock price over the long run.

Financial strength

What I’m interested in here is how strong the balance sheets of Super Group and Food Empire are. A weak balance sheet – one that’s bloated with debt – increases the risk that a company will cause problems for its shareholders.

Here’s a look at the cash and debt levels for Super Group and Food Empire:

Super Group, Food Empire, balance sheet table
Source: Companies’ earnings report

As it turns out, Super Group’s the one with superior financial strength. It has S$124 million in cash on hand and just S$28 million in debt. That’s the opposite of Food Empire, which has more debt on its balance sheet (US$39 million) than cash (just US$28 million).

Track record of growth

Studying the track record of both Super Group and Food Empire can give investors an idea of what to expect from them in the future. Keep in mind though that the past is merely a guideline; it’s not a perfect indicator of the future.

The metrics I want to look at in here are the two companies’ revenue, profit, and operating cash flow. In general, these numbers are a good indicator of a company’s progress in creating long-term value. Here’s how Super Group and Food Empire stack up:

Super Group, Food Empire, growth table
Source: S&P Global Market Intelligence

Super Group’s still the better company here with its faster revenue growth and slower profit decline. That being said, Super Group’s not exactly been doing a great job given its lower profit in 2015 as compared to 2010. The consolation here is that the firm’s cash flow picture has gotten brighter, although an annual growth rate of 4.9% can only be described as anaemic at best.

Valuation

As investors, it’s worth reminding ourselves from time to time that even the best business can be a lousy investment if bought at too high a price. That’s why it’s important to keep an eye on a company’s valuations.

As makers of consumer products, simple ratios such as the price-to-earnings and price-to-sales can be a useful gauge for the value of Super Group’s and Food Empire’s stock. The following table illustrates the valuations for both companies:

Super Group, Food Empire, valuation table
Source: S&P Global Market Intelligence

You may have noticed Food Empire’s absurd-looking PE of nearly 500. That’s not a typo. The company’s earnings have been pressured of late due to the rough political and economic situations strangling its key geographical markets of Russia and Ukraine. An argument can thus be made that Food Empire’s PE ratio is artificially compressed at the moment.

But, that does not remove the fact that the firm’s doing business in parts of the world where there are substantial geopolitical risks. So, despite Food Empire’s much lower PS ratio when compared to Super Group, I still think Super Group should be the winner in this category.

That said, investors may also want to note that Super Group’s valuation is not all that low either. For instance, it has a high PE ratio of 25.2 despite clocking negative earnings growth over the last few years. For perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI) – had a PE of just 11.7 as of 16 March 2016.

A Fool’s take

To sum up what we’ve seen, in a match-up between Super Group and Food Empire, it’s the former which emerges as the ultimate victor. Super Group is the company with the stronger balance sheet, better track record of growth (though I have to stress again that Super Group’s growth has been weak), and the more enticing valuation.

While all that we’ve seen about Super Group and Food Empire are important, they should not be taken as the final word on the investing merits of the two companies. They should be used as starting points for further research – a deeper look is required before any investing decision can be reached.

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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.