3 growth shares that could win big from overseas expansion

Credit: Bertalan Szürös

Running a business on an island with around 24 million people on it has its advantages, but comes with one big disadvantage: a natural cap on how big you can grow.

That’s why these three businesses have begun to look further afield with their growth plans. But with the graveyard of Australian corporates who have gone overseas littered with optimistic projections and failed execution, will these forays succeed?

The head of Premier Investments Limited (ASX: PMV), Solomon Lew, was recently inducted into a retailers’ hall of fame (yes, it’s a real thing), alongside the founders of Ikea and Zara.

Premier has exported its wildly successful Smiggle chain to the United Kingdom, and is looking to grow rapidly in Asia. While supplying colourful stationery to small children may not seem like a sure-fire way to rack up big profits, the team at Premier clearly has the formula to make it work.

The recent half-year results saw net profit rise by 25% over the previous corresponding period, while the EBIT margin also rose 1.8%, which was a stellar result.

There is no reason that the growth phase can’t continue, with the company targeting 70 stores by July 2016, up from the current 42, with a end-of-year target of 100 in time for the Christmas period.

In addition, stores are slated to open in both Malaysia and Hong Kong in coming months.

Wesfarmers Ltd (ASX: WES) has operations spanning coal, grocery retailing and hardware. It is the hardware division that has been chosen to plant the flag offshore, with the recent blockbuster purchase of UK retailer, Homebase.

It is likely the expansion will cost well in excess of $1 billion while Wesfarmers will get 265 Homebase stores, targeting a return on capital of 18% within three to five years.

However, it remains to be seen whether re-badging a struggling number two hardware retailer with the famous red and green colours of Bunnings will be enough to revitalise sales growth. Despite a successful Australian experience, the concern is that market differences between here and the UK will curtail the effectiveness of the model.

However, if it can get it right, the rewards will be substantial, as the UK market is full of do-it-yourself home owners, gardeners and tradespeople who represent a lucrative addressable market.

The a2 Milk Company Ltd (ASX: A2M) is the smallest stock on this list, but may have the most potential for growth. The company has carved out a profitable niche in Australia in the market for fresh milk, with around 9% – 10% market share.

It has done this by providing a differentiated product which has benefits for those who are unable to digest milk properly. A2 milk contains only the A2 protein, compared to standard milk, which contains the A2 protein, as well as the A1 protein. The A1 is thought to be responsible for bloating, indigestion and discomfort in some people.

The company is also exporting high-value baby formula to China under the A2 Platinum brand. It has begun investing in distribution of milk under the A2 brand in the UK and the United States. Using the marketing nous which made it successful in Australia, the company could also quickly capture a share of the huge addressable market for fresh milk in the UK and US.

Foolish takeaway

Of the companies on this list, Wesfarmers’ foray into the UK carries the most risk, while Premier looks to be well into its expansion strategy. However, a2 Milk appears to have the best strategic position, with a differentiated, higher-margin product and a marketing playbook that can be replicated in two comparable markets.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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