A growth stock is a company that is fast-growing and is increasing its revenue each year. These stocks usually command at a much higher price-to-earnings multiple than their mature counterparts. For instance, high growth companies such as Tencent Holdings Ltd, Amazon.com, and Netflix have multiples of 37, 171 and 145 respectively. In comparison, mature stocks that are not growing as fast, like Apple, DBS Group Holdings Limited (SGX: D05) and Starbucks Corporation have much lower multiples of 18, 13.5 and 16 respectively. As you can see, investors are willing to pay a premium for high-growth companies, in anticipation of greater profits…
A growth stock is a company that is fast-growing and is increasing its revenue each year. These stocks usually command at a much higher price-to-earnings multiple than their mature counterparts.
For instance, high growth companies such as Tencent Holdings Ltd, Amazon.com, and Netflix have multiples of 37, 171 and 145 respectively. In comparison, mature stocks that are not growing as fast, like Apple, DBS Group Holdings Limited (SGX: D05) and Starbucks Corporation have much lower multiples of 18, 13.5 and 16 respectively. As you can see, investors are willing to pay a premium for high-growth companies, in anticipation of greater profits in the future.
But even with their premium valuations, growth stocks can provide excellent value for investors if the shares can live up to their expectations and grow their businesses as the market expects. That said, it is also important for growth-stock hunters to try to buy these stocks at reasonable valuations. Paying over the top for high growth companies may not end well. The dot.com boom is a perfect example of over-enthusiastic investors that led to heartbreak and massive losses, for some.
Over the last few months, I have come across two attractively valued growth stocks in Singapore that growth hunters might want to consider.
HRnetGroup Ltd (SGX:CHZ), which went public in June last year, is the biggest recruitment agency in the Asia Pacific region outside of Japan. The company derives its revenue from flexible staffing and professional recruitment services and operates through key brands such as Recruit Express and RecruitFirst.
Before its listing, the company was a private company for 25 years and had an impressive track record of growth. Between 2007 and 2017, HRnet’s net profit compounded at a rate of 12.6% per annum. Moreover, since its listing, the company’s growth has accelerated in the last few quarters. In 2017, the company’s top line increased by 7.4%, and then a further 12.2% in the first quarter of 2018.
Its net profit continues to grow at pace as well, as net profit in 2017 (excluding one-off IPO expenses) increased 15.4% in 2017. In the first quarter of 2018, profit after tax spiked 34.1%.
The group has been proactively trying to increase employee productivity by offering share compensation for high-performing sales staff. This has worked wonders with revenue and gross profit per sales employee rising at double-digit pace in the first quarter of 2018.
Furthermore, with the initial public offering, the group now has the additional financial muscle to make acquisitions to expand into more markets. It has already acquired a 51% stake in PT HRnet Rumbun in Jakarta to gain exposure to the fast-growing Indonesian market.
At the time of writing, HRnet shares trade at S$0.90 apiece. This gives it a reasonable price-to-earnings multiple of 16.5.
China Sunsine Chemical Holdings Ltd (SGX:CH8) is a specialty rubber chemical producer. It is the world’s largest producer of rubber accelerators — with a 20% global share — and China’s largest producer of insoluble sulphur. Its chemical is sold to 65% of the global top 75 tyre makers including well-known brand such as Bridgestone, Michelin and Goodyear.
The company has shown consistent growth over the last five years, with revenue increasing from RMB1.7 billion in 2014 to RMB2.74 billion in 2017. Its bottom line has also increased by a compounded rate of 34% a year from RMB76.7 million to RMB341.4 million.
Over the longer term, the firm has recorded a profit each year since the management buy-out led by chairman Xu Cheng Qiu in 1998. Despite the challenges faced in a highly-competitive industry and volatile raw material prices, the company has maintained a steady return on equity of 22% in 2017, and has a robust balance sheet with RMB566.4 million in cash and zero debt.
It has also actively sought to increase its production capacity. It has plans to increase its insoluble sulphur and accelerator production capacity by an additional 10,000 tons each. Below is a table showing its track record of growing its production capacity over the years:
Source: China Sunsine Chemical Holdings Ltd second-quarter earnings release
At the time of writing, shares of China Sunsine Chemical Holdings were S$1.21 per piece, giving it a price-to-earnings ratio of just 4.78 and a price-to-book multiple of 1.41.
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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 Jeremy Chia own shares in Starbucks Corporation, DBS Group Holdings Limited, HRnetGroup and Tencent Holdings Ltd. The Motley Fool Singapore has a recommendation on DBS Group Holdings Limited, Apple, Starbucks Corporation, Amazon.com, HRnetGroup and Tencent Holdings Ltd.