IN­TRAPRENEUR PORT­FO­LIO

8 EX­EC­U­TIVES YOU CAN TRUST TO DE­LIVER SU­PE­RIOR IN­VEST­MENT RE­TURNS

Finweek English Edition - - FRONT PAGE - By Marc Ash­ton

In a coun­try where the na­tional sav­ings rate is ef­fec­tively zero, if you ever want an ice-breaker for a din­ner con­ver­sa­tion that’s sure to be it. In­vari­ably the dis­cus­sion will quickly turn to an un­der­per­form­ing unit trust or re­tire­ment prod­uct or, if you have a more so­phis­ti­cated au­di­ence, then maybe there will be some men­tion of a stock­bro­ker who’s made some good calls for some­body at the ta­ble.

But that still doesn’t an­swer the orig­i­nal ques­tion. And be­cause busi­nesses are ac­tu­ally run by peo­ple and not pa­per shuf­flers in suits, Finweek set out to find eight busi­ness “king­pins” our read­ers could en­trust their cap­i­tal to over the next few years and see an in­vest­ment re­turn.

“We pay great at­ten­tion to man­age­ment teams who fo­cus on eco­nomic re­turns rather than tar­gets such as ‘turnover of R15bn by 2013’ or ‘in the Top 40 by 2012’,” says Si­mon Fillmore, of In­de­pen­dent Se­cu­ri­ties. Fillmore adds: “Sim­plis­ti­cally speak­ing, eco­nomic re­turns mea­sure the in­come state­ment prof­itabil­ity ver­sus the bal­ance sheet cost of those re­turns and checks whether man­age­ment is achiev­ing re­turn in ex­cess of cost of cap­i­tal.”

Right, that sounds good. But what does it mean for read­ers try­ing to make an in­formed in­vest­ment de­ci­sion and try­ing and make some money from it? Our an­swer: Let’s build a port­fo­lio on which in­vestors can strip out all the noise of the next big thing and run with a group of sim­ple, crisply run busi­nesses that of­fer de­cent long-term re­turns.

When we ini­tially kicked around the con­cept of so-called “in­trapreneurs” we felt there had to be some clear guide­lines about what read­ers were get­ting and how those play­ers would make it on to the list. For that rea­son we chose to ex­clude in­vest­ment hold­ing com­pa­nies (PSG, Pallinghurst, Remgro and Reinet), pri­vate equity (Pal­adin and Brait) play­ers and listed in­vest­ment ve­hi­cles, such as Fo­ord Com­pass and the RE:CM and Cal­i­bre op­tion.

Those will nor­mally trade at a dis­count to their net as­set value due to their “hold­ing com­pany” na­ture. We also didn’t like

the idea of suits mak­ing money from other peo­ple’s hard work by tak­ing away man­age­ment fees.

Highly re­garded small cap an­a­lyst Shawn Stock­igt, of Stan­lib, says the past few years have thrown up some in­ter­est­ing tests of man­age­ment skills. He uses the ex­am­ple of the con­struc­tion sec­tor. “Com­pa­nies such as Wil­son Bay­ley Holmes - Ov­con, Ste­fanutti Stocks and Ce­ramic Hold­ings have so far showed the strength of their man­age­ment teams,” says Stock­igt. “Nick Booth and the team at Ce­ram­ics have stood out, keep­ing costs down and con­tin­u­ing to gen­er­ate de­cent cash flows – even pay­ing out a 1500c/share spe­cial div­i­dend in an en­vi­ron­ment where oth­ers are scram­bling for cash and fight­ing off rights is­sues.”

Other busi­nesses sin­gled out by Stock­igt in­clude Cash­build and City Lodge for their abil­ity to sur­vive a va­ri­ety of dif­fer­ent busi­ness cli­mates.

An im­por­tant dis­tinc­tion that needs to be made: it isn’t al­ways about back­ing an en­tre­pre­neur but rather a CE who un­der­stands how to make the busi­ness – and your in­vest­ment – sweat for a re­turn. Good ex­am­ples of that would be Kevin Hed­der­wick at Fa­mous Brands, Ivan Clark at Grindrod and Michael Jor­daan at First Na­tional Bank.

For ex­am­ple, a R10 000 in­vest­ment with Hed­der­wick in June 2006 would now be worth R44 000, ex­clud­ing div­i­dends, which would then be con­tribut­ing an­other R1 550/year. In other words, on div­i­dends alone you’d be mak­ing an ex­tra 15% on your orig­i­nal in­vest­ment.

That was an­other key is­sue for us: If there wasn’t a div­i­dend be­ing paid to share­hold­ers then there had to be a re­ally good rea­son why not.

Can Clark ex­tract the same value from his in­vest­ment in small cap paint com­pany Chem­Spec that he did at Grindrod? It’s an im­por­tant ques­tion, be­cause in our hum­ble opin­ion Clark could be the game-changer for that com­pany. For an in­vestor who gets in at 38c his fi­nan­cial well-be­ing could be for­ever changed if Chem­Spec could repli­cate the re­turns of the ship­ping group.

The in­surance sec­tor also throws up some in­ter­est­ing de­bates. Who is the bet­ter busi­ness leader: Ju­lian Roberts (for his work in turn­ing around Old Mu­tual), Bruce Hem­phill (for weath­er­ing the storm at Lib­erty Hold­ings) or Adrian Gore (for tak­ing the bull by the horns and turn­ing Dis­cov­ery into a mar­ket leader)?

Adrian Sav­ille, of Can­non As­set Man­agers and a lec­turer at the Gor­don In­sti­tute of Busi­ness Science, says he wasn’t sure he agreed with Old Mu­tual fit­ting the mould but agreed it was im­por­tant to un­der­stand the role a CE or chair­man can play in se­lect­ing a com­pany in which they in­vest. Sav­ille says there are three pil­lars on which a com­pany’s man­age­ment can be judged: the abil­ity to ab­sorb mar­ket con­di­tions, be ag­ile when op­por­tu­ni­ties present them­selves and, most im­por­tantly, se­nior man­age­ment pre­pared to learn from its mis­takes.

In the case of Old Mu­tual, Sav­ille be­lieves while it scores on the ab­sorp­tion front it’s proven less than ag­ile through the cri­sis.

Sim­i­larly in­ter­est­ing de­bates are thrown up in the min­ing sec­tor.

Magda Wierzy­cka, of multi-man­age- ment in­vest­ment firm Syg­nia, points to Cyn­thia Car­roll at An­glo Amer­i­can. “She has faced hor­ren­dous crit­i­cism and pub­lic­ity over the de­ci­sions she has made: for ex­am­ple, cut­ting div­i­dends in 2009 when the com­modi­ties down­turn hit the mar­ket and cost-cut­ting across the busi­ness. And yet she’s stuck to her guns and pulled An­glo through.”

Other names to crop up in­clude Mark Bris­tow, Bernard Swanepoel and Mark Cu­ti­fani. Bris­tow heads Rand­gold Re­sources, one of the few gold min­ers with gen­uine prof­its and growth prospects. That’s sig­nif­i­cant at a time when there’s plenty of talk but lim­ited re­turn for share­hold­ers in gold pro­duc­ers.

Swanepoel is the ex-CEO of gold min­ing heavy­weight Har­mony and, de­pend­ing on who you talk to, he’s ei­ther the ultimate “Mr Fixit” who’s go­ing to un­lock great value at Vil­lage Main Reef, in con­junc­tion with its Sim­mer & Jack trans­ac­tion, or it will sim­ply be more blus­ter. Cu­ti­fani heads An­gloGold Ashanti. The acid test ul­ti­mately was if those in­di­vid­u­als were dropped into an­other busi­ness could they make a ma­te­rial change to the cul­ture of the new com­pany and make it run sim­pler and smarter while de­liv­er­ing re­turns for share­hold­ers.

“Ego” was a word brought up on oc­ca­sion and many felt CEs had learnt some hum­bling lessons due to the global fi­nan­cial cri­sis, par­tic­u­larly those op­er­at­ing smaller busi­nesses.

War­ren Dick, of In­vestor­centre.co.za, cites BHP Bil­li­ton’s Mar­ius Klop­pers’ abil­ity to walk away from high-pro­file deals when nec­es­sary. “I ap­pre­ci­ated the dis­ci­pline he demon­strated, be­cause in the ex­am­ple of the hos­tile takeover of Rio the tim­ing was clearly wrong as the global fi­nan­cial cri­sis came into play. BHP had the gump­tion to re­alise that and walk away from the deal, say­ing ‘the risks to share­holder value would in­crease to un­ac­cept­able lev­els’.”

Our port­fo­lio won’t have you swing­ing for the fences in terms of in­vest­ment re­turn, but we’re pretty con­fi­dent you’ll have some sim­ple busi­nesses with world­class lead­ers look­ing af­ter your cap­i­tal.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.