The Motley Fool

2 Home-Grown Companies Positioned For Growth

If you are looking for new growth stocks to add to your portfolio, you may want to consider BreadTalk Group Limited (SGX: CTN) and HRnetGroup Ltd (SGX: CHZ). Despite lower profits in its most recent quarter, BreadTalk is poised for international growth, while recruitment firm, HRnetGroup, is making big strides both in the North Asia market and its core market in Singapore.

The world is its oyster

BreadTalk certainly needs little introduction. The group owns F&B chains in Singapore such as Michelin star-rated Din Tai Fung, Toast Box and BreadTalk, which is well-loved for its famous pork floss buns.

In its most recent quarter, BreadTalk delivered a mixed performance with higher revenue but a sharp drop in profit. However, if we look beyond these numbers, there are good reasons to believe that the company is taking the right steps to return to growth.

BreadTalk is on track to open its flagship Din Tai Fung branch in London. If successful, this will open up doors for more global expansion. Of course, international expansion is not a guaranteed success. Many companies fail overseas due to different cultures and consumer preferences. However, Din Tai Fung has already been given Michelin star status and is well-recognised around the world. London is also a place where Chinese food is well-established, making it a perfect destination for Din Tai Fung.

The group also opened its first Song Fa Bak Kut Teh outlet in Beijing in the last quarter. As most Singaporeans know, Song Fa is one of Singapore’s most famous Bak Kut Teh restaurants, with Singaporeans and tourist queueing up daily at the Clark Quay and Chinatown Point outlets. Like Din Tai Fung, if Song Fa can mark a successful entry into Beijing, it will open many new doors for international expansion.

With the group restructuring its bakery division and being in its early phase of international expansion, it is normal to see volatile earnings from quarter-to-quarter. As such, investors should not be overly concerned with the lower earnings reported in the latest quarter.

However, one thing investors should take note of is that the market has high hopes for BreadTalk with shares trading at a lofty valuation of 43 times trailing earnings at a share price of S$0.88.

Connecting employers and potential employees

Listed last year, HRnetGroup has seen steady growth in its short history as a listed company. Its top line grew by 2.5% and 7.4% in 2016 and 2017, respectively, with net profit increasing at a faster pace of 6.3% and 15.4%. In 2018, its margins have widened even further and revenue growth has accelerated. In the most recent quarter (July to September 2018), revenue was up 7.7%, with net profit surging 17.8%.

There are a few reasons to believe that the strong growth can continue for the foreseeable future.

For one, founding chairman, Peter Sim, has overseen the steady growth of the firm, which started as just a four-man team to one that has more than 1,000 staff working across 13 cities in Asia. Between 2007 and 2017, its net profit has compounded by an impressive 12.6%.

The group consistently strives for higher efficiency and growth. Last year, it initiated a co-ownership scheme to incentivise sales staff to hit their sales target by offering them stakes in the company. The incentive scheme has worked wonders, with revenue and gross profit earned per sales staff increasing in the past year. This has led to growing sales and higher profit margins.

Moreover, HRnetGroup is actively looking for more ways to expand its business, both locally and internationally. This year alone, it made acquisitions to kick start its business in Jakarta and Suzhou.

It also has plenty of cash to make more acquisitions and to fund its operations. In its latest earnings update, management said it had S$275 million in cash and zero debt, giving it plenty of room to continue its expansion phase.

Perhaps the best thing about the firm’s shares right now is that it has gone somewhat under the radar in the stock market. It currently trades at S$0.80 per share, which equates to just 12.7 times earnings, an attractive valuation for a growth stock with no debt.

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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 HRnetGroup Ltd. The Motley Fool Singapore has a recommendation on HRnetGroup Ltd.