The UL­TI­MATE growth share

Some stal­warts don’t shape

Finweek English Edition - - Cover - VIC DE KLERK

THE UL­TI­MATE GROWTH stock is more than just a myth. In the United States, Google is in the process of tak­ing over the man­tle that’s long been over the shoul­ders of Ge­nen­tech. In South Africa, shares in the telecom­mu­ni­ca­tions, me­dia and tech­nol­ogy (TMT) sec­tors have for some time been dis­plac­ing the coun­try’s shares in the tra­di­tional min­ing and fi­nan­cial sec­tors as the top growth stocks. And SA’s ul­ti­mate growth stock will prob­a­bly also be found in those sec­tors.

Af­ter con­sid­er­able elim­i­na­tion in our search for those spe­cial shares with un­lim­ited op­por­tu­ni­ties reach­ing for the so-called “blue sky” we sin­gled out two as lead­ing growth stocks: MTN and Naspers. The lat­ter, af­ter its suc­cess­ful re­cent rights is­sue aimed specif­i­cally at ob­tain­ing cash for ex­pan­sion in emerg­ing in­dus­tries and mar­kets, leads by a short head.

The choice might seem strange, since Naspers owns Fin­week. How­ever, don’t lose sight of the fact that in the past I haven’t hes­i­tated to crit­i­cise Naspers: for ex­am­ple, when it be­came in­volved in OpenTV, the US mir­a­cle from which we yet have to see any ma­jor re­sults. Naspers at times ob­sti­nately and blindly de­fended that in­vest­ment, even when the price of OpenTV plum­meted from US$250 to $7/share. For­tu­nately, the com­pany even­tu­ally de­cided to sell that in­vest­ment.

And I’ve also not been slow in the past in show­ing up Naspers’s poor man­age­ment with re­gard to for­eign ex­change risks. That, for ex­am­ple, re­sulted in M-Net/Su­perS­port be­com­ing tech­ni­cally in­sol­vent, be­cause all forex li­a­bil­i­ties in so-called strong cur­ren­cies were slav­ishly cov­ered 24 months in ad­vance – even when the rand was as weak as US$1/ R12. That was sim­ply sloppy man­age­ment of for­eign ex­change risk.

Since the dark­est days in 2002 – when Naspers’s price fell to 1 245c/share – the com­pany has re­asserted it­self. It’s still a strong mag­a­zine and news­pa­per pub­lisher and the im­por­tant role that this di­vi­sion (Me­dia24) plays in its sta­bil­ity has been re­dis­cov­ered.

Or­di­nary pay TV is a ma­jor con­trib­u­tor to cash flow and should be nur­tured. OpenTV’s cur­rent share price of $2,41, three years af­ter Naspers sold it at $7/share, per­haps tells how mis­placed that con­fi­dence was at the time.

Mot­ley Fool, Amer­ica’s pop­u­lar In­ter­net in­vest­ment ad­viser (de­spite the name, a very se­ri­ous player), re­lies slav­ishly on the dis­count­ing of fu­ture cash flow in its search for the so-called per­fect buy-and-hold share and the ul­ti­mate growth stock.

Find­ing the lat­ter means find­ing a com­pany that gen­er­ates and can gen­er­ate both cur­rent and fu­ture cash flow. On the ex­tent of the fu­ture cash flow there must be lit­tle, if any, lim­i­ta­tion. That ex­plains the “blue sky” in the search for this ul­ti­mate growth stock.

With that as the bench­mark, US in­vestors

gave their full back­ing to Ge­nen­tech as the ul­ti­mate growth stock a few years ago. The com­pany’s code on Wall Street – DNA – de­scribes its ac­tiv­i­ties in the bio­med­i­cal in­dus­try and also ex­plains why it has long been the US’s favourite growth stock.

A quick look at the group’s latest fi­nan­cial state­ments re­veals an im­pres­sive score­card called “Ob­jec­tives for 2010”. One of those is to gen­er­ate free cash flow of $12bn (around R88bn) by 2010, com­pared with the mere $1bn (R7,30bn) achieved last year.

That’s part of the rea­son why Mot­ley Fool’s “num­ber cruncher” reg­u­larly spits that com­pany out as the ul­ti­mate growth stock. In­ci­den­tally, SA com­pa­nies could take a look at Ge­nen­tech’s 2010 score­card and com­pile sim­i­lar ones them­selves.

How­ever, Ge­nen­tech’s share price over the past 18 months hasn’t man­aged to re­flect its sta­tus as the ul­ti­mate growth stock – and that’s why in­vestors are shift­ing their at­ten­tion to Google. That share has in­creased its price by more than 360% since list­ing in third quar­ter 2004 and op­por­tu­ni­ties for the com­pany abound.

Thomas B Ril­ley, ex­ec­u­tive di­rec­tor of the Cen­tre for Elec­tronic Gov­er­nance, re­cently de­scribed the chal­lenges of the con­cept of knowl­edge econ­omy as fol­lows: “The only com­par­a­tive ad­van­tage a com­pany will en­joy will be its process of in­no­va­tion and its abil­ity to de­rive value from in­for­ma­tion. We’re now an in­for­ma­tion so­ci­ety in a knowl­edge econ­omy.”

I re­lied heav­ily on that con­cept when elim­i­nat­ing sec­tors and shares that don’t com­ply with the re­quire­ments of an ul­ti­mate growth stock.

The first sec­tor that must be elim­i­nated is the tra­di­tional min­ing in­dus­try, led by gold, on which the SA econ­omy was orig­i­nally built. Gold pro­duc­tion in SA has reached its sun­set days. The plat­inum trio – Am­plats, Im­plats and new­comer Aquar­ius – have fared bril­liantly over the past two years and recorded in­cred­i­ble share price in­creases of be­tween 100% and 400%. Nev­er­the­less, min­ing – with its de­clin­ing re­serves and lim­ited new tech­no­log­i­cal de­vel­op­ment in min­ing and re­fin­ing the fi­nal prod­uct – can’t ben­e­fit much from the new knowl­edge econ­omy’s tech­no­log­i­cal de­vel­op­ment. The same goes for Sa­sol.

But some­where there’s a com­pany like sxr Ura­nium One that, de­spite the nearly un­prece­dented in­crease in its share price over the past year – largely as a re­sult of the de­mand for ura­nium – could be a huge growth stock, be­cause it’s in the right sec­tor.

SA’s fi­nan­cial sec­tor has overde­vel­oped it­self in our econ­omy and the chal­lenges there are, as Absa did, to find a large in­ter­na­tional part­ner or, as Stan­dard Bank is do­ing, to fo­cus on other emerg­ing mar­kets.

In­vestec plc has proved that it can com­pete well in the heart of Lon­don’s fi­nan­cial dis­trict, but it’s not likely to catch up with or take over one of the world gi­ants, such as JP Morgan or HSBC.

SABMiller and Richemont were also on my screen for a while as pos­si­ble per­fect growth stocks, but in both cases they lack that charm of in­no­va­tion and play­ing around in the knowl­edge econ­omy. Both are prob­a­bly per­fect buy-and-hold shares.

The drive and pas­sion of an en­tre­pre­neur still ac­tively in­volved in his own busi­ness of­ten makes the com­pany a huge growth stock. Two ex­am­ples are cer­tainly Bill Gates and his great friend War­ren Buf­fett, who are both ac­tively in­volved in their re­spec­tive win­ners, Mi­crosoft and Berk­shire Hath­away. But you won­der what the fu­ture holds for both of them and whether their suc­ces­sors will show the

same pas­sion.

Both those shares are prob­a­bly ex­cel­lent buy-and-hold op­por­tu­ni­ties and, es­pe­cially in the case of Berk­shire, there must be enor­mous op­por­tu­ni­ties to un­lock value af­ter the fi­nal and in­evitable re­tire­ment of the al­most 80-year-old Buf­fett. But it still doesn’t hold the prom­ise of “blue sky” that Google and Ge­nen­tech do.

For the same rea­son I elim­i­nated top SA shares such as Bid­vest, Im­pe­rial, the Al­tech group, Stein­hoff and a few oth­ers as can­di­dates for the ul­ti­mate growth stock. Once again, they aren’t bad in­vest­ments and they cer­tainly be­long in any good port­fo­lio.

SA’s re­tail­ers re­main an at­trac­tive group, es­pe­cially if they fo­cus on the enor­mous po­ten­tial in the lo­cal mar­ket. But it’s also a fact that few re­tail mod­els last for long, as our well-known old OK Bazaars and Greater­mans showed a long time ago.

The new fo­cus on credit ex­ten­sion and the ac­com­pa­ny­ing prac­tices, along with the ex­pected in­crease in in­ter­est rates, bring a few dark clouds on to the once blue sky of quite a num­ber of such com­pa­nies. Nev­er­the­less, I couldn’t avoid in­clud­ing Mass­mart and Mr Price on my short list as two that are nearly per­fect growth stocks.

That brings us to SA’s TMT sec­tor, in which one T – tech­nol­ogy – is fairly unim­pres­sive. A few years ago, Di­men­sion Data – which at one stage was the third-largest com­pany on the JSE – would eas­ily have made it to the short list of per­fect growth stocks, but its busi­ness model has since failed the test.

SA’s re­tail­ers re­main an at­trac­tive group, es­pe­cially

if they fo­cus on the enor­mous po­ten­tial in the

lo­cal mar­ket.

The lead­ers in the TMT sec­tor – MTN (six), Telkom (14) and Naspers (18) – have over the past few years taken up im­por­tant po­si­tions in the rank­ings of com­pa­nies with the largest mar­ket cap­i­tal­i­sa­tion on the JSE. With all three among the top 20 – while 10 years ago rel­a­tively lit­tle was known about them – it’s clear that SA’s ul­ti­mate growth

stock must be found in that sec­tor.

MTN was the share over the past five years and it’s dif­fi­cult not to place it top of the list again. The graph for Naspers and MTN over the past seven years shows only one win­ner for that pe­riod. But Naspers’s re­mark­able re­cov­ery over the past three years over­shad­ows even MTN’s on­go­ing growth.

The ease with which Naspers re­cently ac­quired R7,4bn of new cap­i­tal from its share­hold­ers through a rights is­sue con­firms in­vestors’ con­fi­dence that this com­pany will make the right in­vest­ments in fu­ture in what’s broadly known as the knowl­edge econ­omy.

In the US, in­de­pen­dent ad­viser Travis John­son re­cently summed up Naspers’s po­ten­tial in three re­search re­ports by call­ing it “a nice, global busi­ness mix”. He iden­ti­fied the growth op­por­tu­ni­ties in Me­dia24 and Mul­tiChoice (pay TV), the group’s two solid foun­da­tions, in SA.

He men­tioned the group’s In­ter­net suc­cesses and pointed out that Naspers’s ef­fec­tive 36% in­ter­est in Ten­cent, China’s pop­u­lar QQ.com and one of the world’s largest well-known brands, is cur­rently worth $2bn – around 25% of Naspers’s to­tal mar­ket cap.

John­son also liked the group’s plans in Brazil. Rus­sia and Thai­land, which, along with its ex­po­sure in China, ex­pands its pres­ence in the world to at least three of the pop­u­lar so-called BRIC coun­tries (Brazil, Rus­sia, In­dia and China).

More in­for­ma­tion on John­son’s re­search and views on Naspers, as well as other growth op­por­tu­ni­ties in the knowl­edge, com­mu­ni­ca­tions and in­for­ma­tion en­vi­ron­ment, are avail­able on his web­site, seek­ingal­pha.com. His views on Naspers from an Amer­i­can view­point def­i­nitely put the com­pany in a new per­spec­tive as an im­por­tant emerg­ing player in the world’s com­mu­ni­ca­tions and knowl­edge econ­omy.

So that ex­plains my choice of Naspers as the ul­ti­mate growth stock on the JSE.

Koos Bekker,

Ralph Haven­stein,

Am­plats CEO

Neal Frone­man, sxr Ura­nium One CEO

Alastair McArthur, Mr Price CEO

NASPERS AND MTN... TWO TEN BAGGERSGGERS COM­PET­ING FOR HON­OUR

Source: Ya­hoo! Fi­nance

GOOGLE, GE­NEN­TECH... UL­TI­MATE

GROWTH STOCKS

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