3 Growth Stocks with High Gross Profit Margins

By ShareInvestor – 02 October 2019

Heads-up -> If you haven’t heard of the “Growth Portfolio Series” before, do check out our 4 portfolios to help you screen stocks based on your investment personality over at http://portfolio.shareinvestor.com.

Article highlights:

  • Growth Investing outperformance for past 9 years
  • UnUsUaL – A potential rebound in concerts & family shows
  • myNEWS.com – Steady profit growth coupled with a 62.1% ownership
  • Amazon.com – Online market leader with ever-increasing gross margins
  • Common Metrics of Spectacular Growth Stocks

If you aren’t aware yet, growth investing has outperformed value investing over the past 9 years according to this infographic.

These namesake growth stocks we have heard about are companies like Amazon, Alibaba, Alphabet (famously known as Google), Facebook which continue to command a dominant market share and expand their businesses over the long run.

You can also read about our previous article on Facebook here.

With that in mind, we came up with 3 metrics inside Shareinvestor Webpro to screen for growth stocks (data as of 26 September 2019):

  • Revenue Growth > 15% for past 3 years
    Revenue is the lifeblood of a growth company. You need it to keep growing over the long run in order to compensate on the higher risks involved.
  • Gross Margins > 25% for past 3 years
    Companies like Amazon, Shopify, Netflix have raked in losses over many years as they spend heavily on R&D + marketing to ‘cement their dominant market position’. Gross margins can be one way to measure if they are highly efficient and constantly in the lead.
  • Price Upside from Analyst Consensus Estimates > 20%
    As a growth stock, it needs to be widely covered by analysts. As such, we want the average target price of analysts to be more than 15% of its current share price.

Sourced from Shareinvestor’s Webpro

In addition of the 3 criteria, we have filtered for 3 growth stocks across SGX, Bursa and NASDAQ for a more complete experience.

1. 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 and subsequently listed as UnUsUaL Limited on 10 April 2017.

Some of its past successful events include:

  • Wang Lee Hom’s Descendants of the Dragon 2060 World Tour in Singapore
  • JJ Lin’s Sanctuary World Tour
  • Westlife’s The Twenty Tour

On top of the live events, UnUsUaL is also moving inroads to family entertainment shows such as Walking with Dinosaurs and Disney on Ice. It also secured the rights to develop and co-produce APOLLO, a show that celebrates the 50th anniversary of man's first steps on the moon.

Sourced from Shareinvestor’s Webpro

Despite organizing many acclaimed concerts for famous singers and expansion into family entertainment shows, UnUsUaL’s share price has plunged around 50% from a high of S$0.525 on 4 Dec 2017.

Below, we take a look at the company’s financial snapshot and check out its financial numbers in more details.

Financial Snapshot sourced from ShareInvestor’s Webpro

From the above, we can see that UnUsUaL’s revenue and profits have increased over the past 2 years. To add on, UnUsUaL commands superb gross and net margins above 40% and 20% respectively.

On the flip side, UnUsUaL’s free cash flow is negative for the past 2 years and we are also seeing a slip of the return on assets over past 15months.

CashFlow position sourced from ShareInvestor’s Webpro

A quick glance at its cashflow position shows that UnUsUaL has been plowing a huge chunk of cashflow into investment activities.



Sourced from UnUsUaL results release

When I dig further into its FY2019’s results, I found out that a big part of the cash outflow is attributed to:

  • Deposit for their future events.
  • Purchase of plant and equipment
  • Purchase of intangible assets
  • Addition of right-of-use assets

In my opinion, the purchase of intangible assets and right-of-use assets is probably a one-time S$8.1 million and when we exclude it, the trailing 12M Jun 2019 free cash flow will stand at a positive S$0.5 million.

Next up, the past 3 years of profit & loss for UnUsUaL also paints a good picture as both revenue and growth have been on a steady ascent.

Sourced from Shareinvestor’s Webpro

That said, its 1QFY2020 revenue saw a huge 28.3% fall from S$6.03 mil to S$4.32 mil on a year-to-year basis. Its net profits fared worse, plunging 54.7% from S$2.36 mil to S$1.07 mil during the same period.

The poor results was mainly attributed to a decrease in Promotion and Other revenues of S$1.8 million and this is what the management has to say on the recent results:

“As in our past years, our concerts/events are not seasonally driven. Our performance is based on the concerts/events we actually present. We consistently maintained a list of well-known performers and artistes over the years. In the later part of this year, the following concerts/theme shows have been planned – concerts by Westlife, Andy Lau, Kang Daniel and JJ Lin, and themed shows Disney’s Frozen and Walking with Dinosaurs.

We expect to maintain our performance for this year. As we observed previously, there is continued demand for concerts in the markets we operate in. In addition, our Apollo 11 project, commemorating the 50th anniversary of the Moon landing, kicked off in early July. The show has received positive reviews.”

Taking the excerpts from the Management’s comments and a page from the RHB’s analyst report, it seems like UnUsUaL’s financial results are due for an uplift in the 2Q and 3QFY2020 given the pipeline of concerts for Andy Lau, Westlife and JJ Lin etc.

Based on its share price of S$0.27 per share, UnUsUaL trades at around 31.4 times its trailing price-to-earnings ratio and does not pay out any dividends.

2. MyNEWS Holdings Berhad (5275.MY)

myNEWS.com is a convenience retail chain store located in Malaysia. Since its inception in 1997, myNEWS.com has evolved from a single newsstand to the largest homegrown retail convenience store chain in Malaysia.

Founded by Dang Tai Luk, its first flagship store opened on 25 December 1996. As of June 2018, the group operates more than 410 outlets nationwide under brands such as myNEWS.com, newsplus, MAGBIT, THE FRONT PAGE, as well as WHSmith, which is operated under our equal joint venture with WHSmith Travel, one of UK’s leading retailers.

What’s more, myNEWS.com is also involved in the operation of WHSmith news and book retailing stores in airports throughout Malaysia, and run a food and beverage outlet named Bison Café. It is currently serving over 2.5 million customers monthly and has more than 1000 employees.

Sourced from Shareinvestor’s Webpro

myNEWS’s share price has been doing well in the past 3 years, up 247.7% from S$0.545 April 2016 to S$1.35 at the time of writing. That translates to a mouth-watering average 82.5% returns annually!

The jump in share price can be attributed to one primary reason – the solid growth in both the revenue and net profits over the years as seen below:

Sourced from Shareinvestor’s Webpro

From the above, myNEWS increased their revenue 213.2% from RM217.54 mil in FY2015 to RM463.7 mil in trailing 12M April 2019. The hike in net profits were in line, skyrocketing 215% from RM13.51 mil to RM29.05 mil in the same period.

Sourced from Shareinvestor’s Webpro

Moreover, myNEWS.com is tightly controlled by the founding family. From the above ownership table, D&D Consolidated Sdn Bhd is the largest shareholder and it is controlled by founder and managing director Dang Tai Luk, chief operating officer Dang Tai Wen, executive director Dang Tai Hock and two other siblings.

Including the shares held by the two brothers who are not directors of D&D — Dang Tai Kien (3.36%) and Dang Tai Gean (1.34%) — the total stake comes up to a good 62.13%. This ensures that the management team continues to run the company in alignment of the shareholders’ interest since they have skin in the game.

Based on its share price of RM$1.35 per share, the group trades at around 33.9 times its trailing price-to-earnings ratio and offers a distribution yield of 1.48%.

3. AMAZON.COM (AMZN.NQ)

Amazon.com, Inc. probably needs no introduction as the largest U.S. online retailer. Pivoting from its market leadership, it has tapped on many various ways to monetize its base such as:

  • Amazon Prime
  • Kindle tablets
  • Amazon Web Services (AWS)
  • Amazon Alexa

There are still many more avenues where this online behemoth is placing sizable bets on including cloud computing, drones, artificial intelligence across many cutting-edge industries. If successful, any of the segment can turns out into another steady revenue stream for the company.

Sourced from Shareinvestor’s Webpro

Amazon’s share price has seen tremendous growth in the past 5 years, up close to a staggering 560%. If you are wondering whether Amazon’s stock has went up too high, Warren Buffett’s Berkshire Hathaway doesn’t seem to think so as he initiated a position in Amazon during May 2019.

According to CNBC, Berkshire upped its stake in the e-commerce giant by 11% again in the following quarter. As at the 2nd quarter’s end, Berkshire now owns 537,300 shares of Amazon, worth $947 million.

Sourced from Shareinvestor’s Webpro

Looking at the P&L picture above, Amazon’s revenue has been growing constantly for the past 10 years. The profit margins of Amazon have always been on the low side (< 5%) because Amazon takes pride in dominating the online space through cut-throat margins. That’s the reason why no competitor can go head-to-head with Amazon since the early days; one of the example being EBay.

And this is reflected in a clearer picture below where Amazon can maintain a high gross margin over the past decade.

Sourced from Shareinvestor’s Webpro

The paltry net margins are in stark difference as compared to the gross margins as shown above. Furthermore, the gross margins have escalated from 22.3% in FY2010 to 41.27% trailing 12M Jun 2019.

One possible explanation is this: Amazon operates a highly profitable business model but continually reinvests its cashflow to ‘expenses’ like R&D, marketing and human resources in a bid to maintain its market leadership. And Amazon has grown to a size where the economics of scale takes effect and results in a steady increase in both gross and net margins.

Sourced from Shareinvestor’s Webpro

Last but not least, when you look at Amazon’s analyst coverage, the average target price is around US$2291.39 which has around 29.58% potential upside from the current share price. In addition, most analysts have been increasing their target prices (brown line) over the past 2 years which is a vote of confidence of where Amazon is headed.

Based on its share price of US$1,768.33 per share, Amazon trades at 72.3 times its trailing price-to-earnings ratio and does not dish out any dividends.

Conclusion

Rounding up the 3 stocks mentioned above, we can see that growth companies can hail from all types of industries – Entertainment, Retail, Online Retail. In addition, growth investing has done pretty well over the past decade where you seek to identify tomorrow’s market leaders – think Facebook, Shopify, Amazon etc.

We have distilled that these market leaders tend to exhibit these few metrics of high revenue growth, spectacular gross profit margins and wide coverage by analysts with significant upside potential.

This is the reason why we have added these criteria into our ShareInvestor’s stock screener as seen above. If you wish to find out more about this popular feature, you can visit http://portfolio.shareinvestor.com for more details.

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

Happy investing!

 

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