I’ve been bullish on Sanne Group (LSE: SNN) for some time, seeing long-term growth potential from the FTSE 250 company. Growth shares can be hit badly by a stock market crash. And that’s exactly what happened to Sanne at the start of the slump. But since an initial sharp dip, something remarkable has happened. The Sanne share price has recovered almost all of its losses, and is now down just 2% in 2020.
The company, which bills itself as “a leading global provider of alternative assets and corporate business services,” gave us an upbeat set of interim figures Wednesday.
First-half revenue grew by 10.7% to £83.9m, with underlying operating profit up 20% to £23m. That’s an impressive operating margin there, up 210bps to 27.4%. It all resulted in a 31% boost to underlying EPS. Free cash flow is strengthening too, up 16% to £15m. The company posted a 4.8p interim dividend, up from 4.7p. Sanne isn’t a big dividend payer right now, offering yields of only around 2%. But it said the rise reflects “the board’s confidence in the prospects for the group.”
The growth path to dividends
And that, ultimately, is what growth shares are about. We buy into a growth stock in the early days of a company’s development, in the hope that it will eventually grow to become a cash cow throwing off lots of money in the form of dividends. I think Sanne has some way to go to reach that status, but I really do see attractive growth prospects while it gets there.
We’re looking at a forecast P/E of 25 by 2021. For a company I think is capable of double-digit earnings growth for a number of years to come, I see that as good value.
FTSE 100 growth share
I’m going to turn to the FTSE 100 for my second growth pick for today. It’s investment management firm Hargreaves Lansdown (LSE: HL), which I’ve admired for some time. My problem in recent years is that I’ve really liked the way the company has been managed. But I haven’t liked the valuation of its shares. I know growth shares usually command a higher valuation than average. But investors can easily push it too high. After watching growth shares for several decades, I’ve seen almost every one of them pushed to an unsustainable high. They inevitably fall back, and it can often be a hefty drop.
The Hargreaves Lansdown share price has suffered during the 2020 stock market crash. The shares recovered a bit from the worst, but are still down 15% year-to-date. But even before then, we’d seen a significant correction. At 1,650p as I write, Hargreaves Lansdown is down 33% since a 2019 peak. You probably wouldn’t be too happy today if you’d bought back then.
Today’s valuation
We’re now seeing a trailing P/E of 28, down from nearly 40 in 2018. Forecasts for an EPS dip this year would lift it a little to around 32, but I really do see that as a short-term blip.
Today’s valuation is still a relatively rich one. But by growth share standards, I think it represents a fair price for Hargreaves Lansdown. And I really do see an exceptionally good company here.
