The best (and worst) shares of 2013
Investors beat global average
SOUTH African companies generated some of the highest returns on capital over the past decade among the world’s listed industrial and service companies, research by Credit Suisse in 21 countries shows.
South Africa’s largest 100 JSE-listed companies generated a median cash flow return on investment (CFROI) of 10%, outperforming those of advanced nations such as the US, Sweden, Japan, Germany and Singapore, and emerging-market peers, including India, Brazil, China and Russia.
This measure, adjusted for inflation and eliminating accounting measures like depreciation, provides a sound way to compare company performance across countries.
The Credit Suisse report illustrates the extent to which South African shareholders have done remarkably well out of their investments, beating the global average.
“On average, South African managers are excellent stewards of investors’ capital. The median South African company, generating a CFROI of 10%, has the potential to fund organic growth of 10% in inflation-adjusted terms,” said David Holland, senior adviser to Credit Suisse and a co-author of the report.
Over the past decade, Coronation Fund Managers, with a median return of 112%, earned by far the highest cash flow return on investment of the biggest listed companies in South Africa. It was followed by Kumba Iron Ore with 36.8%, Kagiso Media with 35.7%, British American Tobacco (BAT) with 31.2% and Truworths International with 23.9%.
The list of top performers is dominated by companies which provide consumer staples — like food, drink and cigarettes — and includes BAT, Spar, Massmart and Tiger Brands.
“Consumer staples margins have increased more than twofold over the past two decades, [which reflects] continued cost containment and an ability to consistently improve operational efficiencies,” said Holland.
The high returns earned by almost all retailers and telecommunication giants MTN and Vodacom, which were both in the top 20 over the past decade, indicate that there may be room for letting more competitors into the market.
This would benefit South African consumers, said Holland.
South African firms trump the 6% long-term global average number — also calculated using inflation-adjusted cash flow and operating assets while cutting out accounting adjustments — for service and industrial firms.
Holland said in general firms that generated CFROI above 6% were seen as value creators, while firms that failed to reach this benchmark were seen as value destroyers.
Measured over the past decade, the worst performers on the JSE were Harmony Gold, with a median return of -1.2%, Sappi, with 1.5%, AngloGold Ashanti’s 2.5%, Tongaat Hulett with 2.6% and Gold Fields with 2.9%.
“Miners and materials companies are concentrated in the bottom. Particularly gold miners have struggled to convert an increasing rand-denominated gold price into shareholder value,” Holland said.
Instead of aggressively increasing their production, gold-mining companies, which had seen cash costs rise 15%20% a year over the past five years, were shifting their focus to “quality” assets that did not destroy shareholder value, he said.