5 Growth Stocks with Above-average Return On Equity (ROE)

Growth Investing has been increasingly popular with the rise of many tech and software companies in recent years. When we talk about growth stocks, they are usually companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.

In addition, these companies typically reinvest their earnings to fuel their business growth, rather than pay a dividend to shareholders. Hence, investors can use an important metric - return on equity (ROE) to identify well-managed companies by measuring how much profit a company generates from its total net assets.

Return on equity (ROE) is computed by dividing a company's net income into average common equity. For example, a company that earns 15 cents on each dollar of equity has an ROE of 15%.

By and large, analysts expect growth stocks to achieve a 15 percent or higher return on equity. With that in mind, we utilized Shareinvestor Webpro to screen for growth stocks listed in SGX using 2 criteria (data as of 31 July 2019):

  • Return on Equity (ROE) more than 15% for the past 1 financial year
  • Net Earnings Growth more than 15% annually for past 1 financial year

Sourced from Shareinvestor’s Webpro

And below are the 5 companies we have chosen among the list:

1. OXLEY HOLDINGS LIMITED (5UX.SI)

Oxley Holdings Limited (“Oxley” in short) is a home-grown Singaporean property developer. Since its inception, the Group’s accelerated growth has resulted in a burgeoning presence both locally and overseas. It now has a presence across 12 geographical markets including Singapore, United Kingdom, Ireland, Cambodia, Vietnam and more.

Oxley’s property development portfolio encompasses choice residential, commercial and industrial projects. Key elements of the Group’s choice developments include prime locations, desirable lifestyle features and preferred designs.

As part of its strategic expansion, Oxley Group has also invested stakes in various entities like:

  • Purchased a 20% stake in Galliard (Group) Limited, a leading property developer in the United Kingdom.
  • Acquired a 40% stake in Pindan Group Pty Ltd, an integrated project group based in Western Australia.
  • Accumulated a 15% stake in United Engineers, a Singaporean property development and engineering company that was founded in 1912.

Last but not least, Oxley’s expertise also expands beyond property development; the Group also renders project management and consultancy expertise in Myanmar.

Sourced from Shareinvestor’s Webpro

Looking at the stock chart above, Oxley last traded at S$0.33, down around 10% from a year ago. This is happening even though the firm achieved a good 36.8% earnings growth ttm Mar 2019 and a respectable ROE of 17.6% as shown below.

What could have contributed to the lacklustre performance in Oxley’ share price over the past year? We can quickly ascertain the factors based on the financial snapshot below:

Financial Snapshot sourced from ShareInvestor’s Webpro

Despite Oxley’s impressive bottom-line growth and decent ROE, it fares poorly in other areas such as:

  • Decreasing dividends over past 5 years
  • High debt load (be it Debt/Equity, Debt/Assets)
  • Negative free cash flow

Investors may also be staying away from Oxley due to the cooling measures announced by the Singapore’s government. This is because Oxley Holdings is currently Singapore’s largest developer in terms of residential landbank after a series of landback and enbloc site acquisitions in the past few years.

On the bright side, the local property market seems to be picking up. Singapore private home prices rise 1.5% in 2Q2019, lifted by non-landed properties in prime and city-fringe locations, according to data released by the Urban Redevelopment Authority (URA).

Ms Christine Li, head of research (Singapore and South-east Asia), at Cushman & Wakefield also cited the influx from overseas investors due to the global uncertainty below:

"In addition, the recent turmoil in Hong Kong and the United Kingdom due to the Hong Kong protests and Brexit could bode well for the residential market here as high-net-worth individuals start to eye other wealth centres such as Singapore to preserve their wealth".

In this case, Oxley probably can ride the turnaround if things continue to improve from here. Based on its share price of S$0.33 per share, the group trades at around 0.94 times its price-to-book and has a trailing dividend yield of 4.4%.

2. CHINA SUNSINE CHEM HLDGS LTD (CH8.SI)

China Sunsine Chemical Holdings Ltd. (“China Sunsine” in short) is a leading specialty rubber chemicals producer, the largest producer of rubber accelerators in the world and the largest producer of insoluble sulphur in China.

The Group has over 1,000 customers and serves 65% of the world’s top 75 tire-makers. Over the years, China Sunsine has grown its accelerators’ market share to 33% in the PRC and 20% in the global market. The company believes that the China’s auto market will remain robust over the next few years due to the increasing purchasing power of the Chinese population.

Sourced from Shareinvestor’s Webpro

The above stock chart shows that China Sunsine last changed hands at S$1.13, down around 25% from S$1.50 a year back. That said, it has recovered from its 52 week low of S$0.94 after battling a 38% drop in share price during the August to November 2018 period.

China Sunsine’s financials are painting a good overall picture. It has a net-cash balance sheet and has been paying increasing dividends regularly. It also secured decent revenue and profit growth over the past 3 years with net margins of over 15%.

Sourced from Shareinvestor’s Webpro

In addition, China Sunsine may prove to be an exception in the stigma surrounding S-chips. Since its listing on the Singapore Exchange in 2007, it has grown many-fold without new equity and established a rock-solid financial position fully funded by internal resources.

However, investors should also take note that the few upcoming quarterly earnings may not be so rosy due to a particularly strong set of results last year. Here’s the previous quarterly earnings results if you would like to take a quick look.

And things may not improve as quickly when we infer from the Chairman Xu’s comments:

“As raw material prices are hovering at lower levels, the Group’s ASP for rubber chemicals came under pressure.

At the same time, as some players have resumed their operation after investing more in technological upgrading and environmental protection & safety production equipment, competition is expected to be more intense for some of our products, which will further challenge our ASP.”

Based on its share price of S$1.13 per share, the group trades at around 4.6 times its trailing price-to-earnings ratio and has a dividend yield of 4.9%.

3. CENTURION CORPORATION LIMITED (OU8.SI)

Centurion Corporation Limited (“Centurion” in short) was initially established in 1981 as an audio cassette tape manufacturer. In 2011, a reverse takeover saw the Group successfully diversifying into the accommodation business to capture growth opportunities in this niche market.

Today, Centurion owns, develops and manages quality, purpose-built workers accommodation assets in Singapore and Malaysia, and purpose-built student accommodation assets in Singapore, Australia, the United Kingdom (“UK”), the United States (“US”) and South Korea.

As of 31 December 2018, the Group owns and manages a strong portfolio of 28 accommodation assets totalling 55,408 beds. Following the completion of projects currently under development and undergoing asset enhancement works, the Group’s portfolio of accommodation assets will grow to 31 assets with 62,656 beds by 2Q 2019.

The company is also exploring an asset light strategy by investing in accommodation assets via private funds. In November 2017, Centurion broke new ground with the establishment of its inaugural private fund, the Centurion US Student Housing Fund with a portfolio of 2,145 beds.

A year later in December 2018, the Group announced the successful first closing of its second fund, the Centurion Student Accommodation Fund, which will invest in purpose-built student accommodations globally (ex-US).

Sourced from Shareinvestor’s Webpro

Centurion’s share price has not seen much movement in the past year and currently stands at S$0.415 at the time of writing. Its financial snapshot below sends a mixed set of results for its financial health.

Sourced from Shareinvestor’s Webpro

While revenue has been declining in the most recent year, FY2018 net profits was up 124% instead. This is attributed to net fair valuation gains of S$48.6 million recorded by the Group during the 4Q2018, mainly derived from the Group’s student accommodation in the United Kingdom (“UK”).

Dividend payments are also increasing over the past 5 years. On the flip side, investors should take note of the high debt to equity and assets as the company is in the accommodation business.

On a final note, according to a Savills report, global investments into student housing totalled US$17.1 billion in 2018, more than double of that in 2013. The demand is likely to remain robust as student accommodation assets are of low supply in in mature markets such as Australia, UK and US.

Based on its share price of S$0.415 per share, Centurion trades at 0.67 times its price-to-book and has a dividend yield of 4.8%.

4. UNUSUAL LIMITED (1D1.SI)

Established in 1997, UnUsUaL Limited started as a stage, sound and lighting equipment rental business. With a history and track record of 20 years, it has grown to become one of the leading names in Asia, specialising in the production and promotion of large-scale live events and concerts by Asian and International artistes.

In 2016, UnUsUaL Group of Companies was acquired by mm2 Asia Limited, a Singapore-based, SGX Mainboard listed producer of films, TV and online content. It was subsequently listed on the SGX-ST Catalist board as UnUsUaL Limited on 10 April 2017.

To date, UnUsUaL has organized big-name concerts like JJ Lin Sanctuary Tour in Australia, Wang Lee Hom ‘Descendants of the Dragon 2060’ in Malaysia and currently ventured into family shows like Disney on Ice and Walking with Dinosaurs.

Sourced from Shareinvestor’s Webpro

UnUsUaL’s share price has not been performing well in the past year, down around 32% from S$0.45 and sitting at S$0.31 currently.

What could be some of the causes of its share price decline over the past year? We did some research and found out some possible reasons stated below:

Sourced from Shareinvestor’s Webpro

As shown above, UnUsUaL has enjoyed increased revenue and profits in the past 2 years. Furthermore, it is able to garner some incredible gross margins of more than 40% and consistent net margins of 20%.

On the downside, the company is suffering from a negative cash flow issue. Upon further investigation, we saw that UnUsUaL’s is having a net cash outflow of S$24.2 million, comprising of an increase in trade and other receivables by S$11.7 million, other current assets of S$31.2 million and income tax paid of S$2.0 million.

Sourced from Shareinvestor’s Webpro

Moreover, the company has to pay a deposit of S$10.3 million for future events which also puts a dent in the cashflow from investing activities. This may also be part of the reason why UnUsUaL is taking up bank loans of around S$4.0 million for financing purposes.

Nonetheless, things are looking bright for UnUsUaL as it has delivered a strong set of results for FY2019 - revenue and profits came in at S$56.9 million and S$13.2 million, up 22.6% and 32.0% on a year-to-year basis respectively. The group is also expanding on its ownership of globally appealing shows and live entertainment Intellectual Properties (IP) such as the newly secured Apollo Project.

Based on its share price of S$0.31 per share, the group trades at 24.2 times its price-to-earnings but doesn’t pay any dividends.

5. KODA LTD (BJZ.SI)

Koda limited is a furniture manufacturer and retailer. The company was traditionally a manufacture-for-others type but now it makes original and in-house designed furniture pieces under the KODA brand with an appealing portfolio in a spread price-range.

The company has had efforts in the past few years in retail and distribution, to cater directly to the consumer via its Commune stores chain. The company began operations in 1972 and is helmed by the Koh family through the years.

It currently operates in four nations: Singapore, Malaysia, Vietnam and China with product exported to various other geographies and a significant customer presence in the US.

Sourced from Shareinvestor’s Webpro

Koda last changed hands at S$0.65, almost unchanged from a year ago if you don’t consider the decline from its ascent during December 2018.

Having said that, Koda seems to be doing well in its financial aspects as seen below. The company has registered increase revenue and profits in the past 2 years as well as dividends’ growth in the past 5 years.

Sourced from Shareinvestor’s Webpro

It also scored well in the few financial ratios like ROE (above 10%) and Gross Profit Margins (consistent between 20-40% for consecutive 3 years).

However, investors should be aware that Koda recorded a blip in its 3Q2019 sales revenue and profits mainly due to the absence of US$2.5 million orders relating to two projects shipped in 3Q18. The management also cited that the Chinese economy seemed to be moderating or slowing amidst increased trade friction and may have an impact on Koda’s future growth.

That said, the company is taking efforts to intensify their R&D efforts and roll out new range of products progressively. Based on its share price of S$0.65 per share, the group trades at 6 times its trailing price-to-earnings ratio and has a dividend yield of 1.5%.

Conclusion

Investing in high-growth stocks can deliver phenomenal returns with the likes of Amazon, Facebook and Starbucks.

However, it’s not easy to adopt the concept of growth investing because you have to embrace high volatility and also invest when valuations are pricey. As such, growth investing tends to be riskier than other types of investment strategies out there and may not be suitable for everyone.

On the other hand, it can be rewarding for growth investors who are willing to do their research and hold the stocks for the long run while ignoring the market fluctuations in between.

Happy investing!

Check out ShareInvestor’s webpro to access timely updates to empower your investment research - http://www.shareinvestor.com/sg

 

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