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MONEY FOR NOTHING AND THE CLICKS FOR FREE

27 Mar General

INTERNAL RATE OF RETURN

But next year could be different

There have been significant changes to the top of this table over the past five years or so. Basically, what we’re seeing is some of the older, larger established companies slipping out of the top 20 to make way for newer, smaller companies. Many of the big caps remain good investments, but a new breed of companies is occupying the ground at the top.

Not that the newcomers are that new. To qualify for the internal rate of return (IRR) ranking companies need at least a five- year track record. It measures the total return on investment, share price appreciation and dividends (including special dividends), discounted back to end-December 2002 (see full definition up front). As such, it’s a reasonably long-term measure of the wealth- creating abilities of JSE-listed companies.

But while newer companies are grouping around the top there’s also some consistency evident this year in the top 10. First placed Hosken Consolidated Investments (HCl) was sixth last year and 33rd the year before. That’s the type of share you wish you’d spotted three years ago. Shareholders have been rewarded with a 153,1% IRR over five years to end-December 2007 – an outstanding return in anyone’s book.

Second placed African Dawn Capital (Afdawn) was also near the top last year in seventh place, while Pinnacle Technology Holdings (now fourth) was third and Distribution and Warehousing Network (Dawn), now 10th, was fourth.

That’s the sort of consistency that, if it can be maintained, is often the sign of a quality investment. However, only one company makes the top 10 for the third year in a row: technology products supplier Pinnacle.

But, as always, there have been spectacular disappearances as well. Last year’s top ranked Petmin has dropped down to 65th place. We did warn at the time that might happen, as much of Petmin’s IRR came from a special dividend.

Others have come out of obscurity to claim a top place. OneLogix, in third place this year, was previously 134th.

With volatile stock markets this year, it’s quite likely that if the IRR ranking was calculated to the time of writing the order at the top might well be different. That’s why it’s important for potential investors to try and identify the consistent IRR performers (earlier copies of The Top 200 are useful in that regard), and even more importantly to try and spot those companies consistently climbing up the rankings and likely to continue doing so.

There’s a rich irony in HCI leading the table. Founded and headed by CEO John Copelyn and executive chairman Marcel Golding (who took over the old listed insurance company), the two have their roots in SA’s trade union movement. Fifteen years ago few CEOs would have expected to see Copelyn and Golding running a top performing company and a few older gentlemen members at the Rand Club probably would choke on their gins and tonics to see these”communists”earning accolades for heading a top investment holding company. Really, Golding once sported a little ponytail. Now he’s a top businessman.

But trade unions have proved fertile soil for the new class of former unionists turned capitalists, such as Jay Naidoo. All have probably been given honorary membership at the Rand Club despite old suspicions from some of the old colonels. Copelyn and Golding are alos major shareholders in HCI.

To top it all, HCI is a conglomerate in the worst sense of the word. Interests span gaming, media,hotels and leisure, transport, food and beverages, industrial, technology and financial services. There’s little synergy in that lot, except for HCI’s stated aim of targetting “high growth industries”. Wholly ownded brand names readers will recognise include Vukani Gaming Corporation, Golden Arrow Bus Services, Mettle and Gallagher Estate. Main interests are the Tsogo Sun Group (36,7%) Midi TV, better known as e.tv (65%) HCI Khusela Coal (80%), Clover (45,5%) and investment business Noah (49%).

That’s a fair collection of businesses that have fuelled high earnings growth for HCI, though the company also benefitted from a sizeable (though no doubt justifiable) fair value adjustment to e.tv. Share price appreciation has been fairly modest over the past year or so but a logner view shows HCI’s share price climbing strongly and steadily since mid 2003. That’s why its the winner this year.

AltX-listed Afdawn is a niche provider of financer, financial and property services. It’s welcome to see a financial services company so near the top. It’s sector whose share prices have been under pressure for the past six months due to the global credit crisis.

Another financial services company doing well in the rankings is Capitec, in 11th place. Cadiz, Sasfin and African Bank Investments are all included in the top 41 places.

But it’s only in spot 128 that the first large retail bank – ABSA – makes an appearance. Standard Bank isn’t far behind at 131. Negative sentiment towards banks may have peaked now that it seems interest rates have reached the top of the cycle. As the sub-prime crisis subsides, and if SA interest rates are cut, those shares should start to climb again.

It’s interesting that Afdawn doesn’t pay dividends. Its high IRR comes from remarkable share price appreciation, more than doubling in the year to February.

Third placed OneLogix, a service provider to selected logistics markets, also doesn’t pay dividends. Its share price has been rising strongly since early 2005, though it slowed and even turned negative over the past year. But it’s a small cap share (its price at time of writing was 110c/share; market cap R231 m), so share price appreciation can be extenuated.

OneLogix owns a vehicle distribution company and media courier company but is probably best known as the master franchise holder for PostNet. Buildmax claims 21st spot and Wilson Bayly Holmes – Ovcon is 30th, both with very respectable lRRs. With the last slump in building now towards the back of the five-year IRR measurement period expect to see builders climbing higher up the order next year, even though many share price ratings are looking very demanding.

As a rough rule of thumb we take a 50% IRR as the benchmark for excellence in rewarding shareholders. On that basis, 62 companies in this year’s rankings can be considered excellent investments, five more than last year.

Running down to the bottom of the table, the final placing — Sekunjalo in 200th place – has given investors 20%. That’s higher than the 17,1% Western Areas claimed last year. Overall, IRR is rising – a factor of the long bull market in SA that’s run for more than forun years.

Next year’s ranking should be revealing. End-2002 was shortly before the market climbed out of its last bear phase and the extended bull run began. If share prices can recover strongly this year it will mark a five – year bull run as the bear drops off the back of this table — and IRR should be the highest it has been in five years. ,p> But will that be the case? Unless there’s a change in market conditions, next year may show the start of a bear market and IRR will be heading south.

Source: Finweek – Business Achievement – Shaun Harris