The JSE’s top five performers are global superstars
The Boston Consulting Group recently named five South African companies as top performers in its 2014 Value Creators Report, Turnaround: Transforming Value Creation. Hans Kuipers who is responsible for Strategy and Corporate Developments at Boston Consulting Group discussed the report's findings with Alec Hogg. What is it that Naspers, Imperial, Asor, Aspen and FirstRand have done to gain this honourable spot, and can they be expected to continue their strong performance? This piece will leave you feeling proud of the strong South African stewardship on display and may even help you with some valuable stock-picking ideas! – LF
ALEC HOGG: 2013 investments in the top seven companies and a global list of total shareholder returns. You've doubled your money, but by that, you'd have had to find seven companies out of the thousands – if not tens of thousands – that are listed around the world. It's an interesting exercise anyway, and Hans Kuipers who's responsible for Strategy and Corporate Developments at Boston Consulting Group, talks to us about this list that you put together. I saw from the website that it's 16 years now.
HANS KUIPERS: Yes, we've been looking after TSR (Total Shareholder Return) for the past 16 years and what we found in this year's TSR report, was that it was actually the best year that we've ever seen in terms of Total Shareholder Return results. Out of the 26 industries that we've looked at, 25 actually gave double-digit returns and the average Total Shareholder Return per annum for the last five years measured between 2009 and 2013, was about 20 percent.
ALEC HOGG: The contrarians would be saying 'wow, perhaps our markets are a little over-stretched'.
HANS KUIPERS: Yes, that's actually a very interesting question. Besides this report, we've actually surveyed the investors. We wanted to understand what was important for them in terms of investing and how companies think about Total Shareholder Return. What you actually see today is that about 97 of the investors say that the current stock prices are either fairly valued or overvalued, and that is a departure from last year.
ALEC HOGG: And this is a global perspective, not a South African perspective where we were getting even more nervous. However, there were South African companies that made the list.
HANS KUIPERS: Yes.
ALEC HOGG: Five of them.
HANS KUIPERS: Five of them. Naspers made the list. FirstRand made the list. Imperial made the list as well as ASOR and Aspen.
ALEC HOGG: Let's just unpack those because Aspen, Naspers, and FirstRand have all been on quite an extended period of improving shareholder return – outperforming in their sectors. The other two though, Imperial and ASOR – ASOR is a cyclical business and of course, Imperial's come from a pretty poor base, and have been very well managed lately. What lists did they actually make?
HANS KUIPERS: Imperial made the list we call 'multi business' because there are certain industries that are very hard to classify into one business, so out of the multi business category, they did very well. ASOR made the mining list.
ALEC HOGG: Let's just start with Imperial. You say 'multi business'. How many companies – globally – would be here?
HANS KUIPERS: Globally, we looked at about 60 companies in that list. I think it's maybe important to tell you a bit about the methodology that we used. We started with ten thousand companies worldwide, so we didn't look at every single stock that was available. We filtered it out for what was relevant first.
ALEC HOGG: Was that on market cap?
HANS KUIPERS: That was done on market cap. Then we took a couple of steps in between. The first thing we actually did is we looked at 'have they been listed for the past five years' because otherwise, we obviously cannot calculate the five year Total Shareholder Return. The second criteria that we applied was that at least 25 percent of their shares were free float in order to have fair formula of market value. Lastly, we basically divided them across 26 industries. For each of these industries we applied a market cap threshold, which differed per industry that we looked at, but what we wanted to do, was ensure that at least 70 to 75 percent of the global market in that industry was represented in our index.
ALEC HOGG: So you have 10,000 companies broken down into 26 different subsectors.
HANS KUIPERS: Exactly.
ALEC HOGG: Of those 26 subsectors, how many made your top performing list?
HANS KUIPERS: Out of the 10,000, we kept 1620 companies that we looked at in more detail. What we then did per industry is we made a top ten list so we had 26 top ten lists. Hence, we have 260.
ALEC HOGG: So of that 260 best performing companies – out of the 10,000 that you're looking at – five were South African.
HANS KUIPERS: They were South African.
ALEC HOGG: That's not bad if you consider our percentage of global GDP.
HANS KUIPERS: Absolutely. We had about 20 South African companies in the 1600's – totally – so actually, that's not too bad. I agree with you.
ALEC HOGG: Of those, the best performer was Aspen, which will catch a few people by surprise because you would have thought that Naspers, with its incredible investment into Tencent and what that's done… Why was it that Aspen, which is under the radar – well, it's not quite as high profile as Naspers – why was it that it was able to make such a fantastic achievement?
HANS KUIPERS: If we look at TSR, we actually break it down and TSR if obviously a function of what the share price does and what the change is in cash flow…basically, difference in the cash flow changes such as share repurchases. If we look at capital gains, we split it up further to understand it a little bit more. I'm telling you this to answer your question in a little bit more detail. The capital gains…we look at things like profit growth as well as notable change. The profit growth splits out in sales growth and the margin that you make. If we look at Naspers versus Aspen, then the bulk of the value that Naspers created was in something we call multiple change, which you influence by a lot of things, but mainly by telling your growth story very well to the shareholders. That was about 41 percent of the Naspers change for the actual growth that they…
ALEC HOGG: So the rating was the reason – the improvement in the rating.
HANS KUIPERS: Exactly, and they contributed another 19 percent in terms of actual revenue growth. Aspen followed a more balanced view, so they both worked on their multiple, which is largely also a result of the talks around potential mergers and acquisitions, but they also delivered 23 percent actual growth and that, together with less the tractors on the other dimensions, actually led to the fact that Aspen did very well.
ALEC HOGG: The one we haven't spoken about yet is FirstRand. That's an interesting story, which is now going into decades, but it's fascinating to see that not only are the three musketeers who went in there initially still around, but the company that the created continues to gather momentum.
HANS KUIPERS: Yes, and it's a very interesting company for investors in South Africa because the way they created value for investors in the last five years is at least, working on their profitability, but also what you see them do very distinctly, is give back money to shareholders through dividends. About half of the value that was portrayed in our board, actually came from dividends that they were consistently able to return to shareholders.
ALEC HOGG: What about the sustainability of these five businesses? These are the superstars that perhaps every South African should consider having in their portfolios. When one looks back, it would have been nice to go back five years ago. Into the five years in the future, do they have the kind of business models that can sustain this kind of growth?
HANS KUIPERS: Well, it's very hard to make predictions for the future obviously, but what we can say is that if we look back over 16 years, there are a couple of firms that actually really did consistently well. However, there's another interesting observation that we made: in the last five years, if we compare the Total Shareholder Return of the last five years for the 1620 companies that we have, we see that the real winners were the ones that weren't doing so well in the period before and that's also why our reports go the TSR Turnaround. What we actually saw there, was that many of these companies that didn't do so well in the period from 2004 to 2008, actually realised that TSR was something they really need to pay attention to and they managed to embark on this TSR Turnaround change and actually deliver superior value. In addition, if you look in the top ten lists of the 26 industries, we see that the TSR Turnaround candidates are significantly overrepresented.
ALEC HOGG: As one would expect, but it's also interesting to see those three companies, FirstRand, Aspen, and Naspers continuing. If you went back five years, they wouldn't have been amongst the worst performers. It's a fascinating study that Boston Consulting Group have put together. You can get it online. It's easy enough to just Google. It's called the TSR Turnaround Report and there's lots of detail. I was going through it and almost missed coming into the studio on time as a result. Well, thanks from us here in South Africa. That's all we have for you today.