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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-management 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 world-class leaders looking after your capital.
Dictionary definition of an intrapreneur
“An employee of a large corporation who is given freedom and financial support to create new products, services, systems and does not have to follow the corporation’s usual routines or protocols.”
Ivan Clark
(Grindrod [JSE:GND])
earnings multiple: 8
Dividend Yield: 3,85%
(Chemical Specialities [JSE:CSP])
earnings multiple: -1,36
Dividend Yield: 0,52%
Neither Grindrod nor ChemSpec can currently claim to be in the good books of investors. However, there are plenty of reasons to trust Clark’s judgment and we’ve taken a double gamble on him by including both Grindrod and ChemSpec in our portfolio.
Clark has always voted with his wallet and was a consistent buyer of Grindrod in its early life stage. All shareholders scored on the way up and we must remember Grindrod still has some big projects bubbling under, including ports operations and a promising financial services and banking business on the go. At eight times historical earnings and a decent dividend, it’s hard to ignore.
ChemSpec is the “swing for the fences” small cap inclusion in our portfolio. As chairman, Clark is unlikely to tolerate any questionable corporate governance issues that often plague small caps. If he gets it right this portfolio could be a generous outperformer.
Mark Cutifani
(AngloGold Ashanti [JSE:ANG])
earnings multiple: 44
Dividend Yield: 0,52%
We thought long and hard about including a gold stock in our growth portfolio but sovereign debt issues in Europe and the debt ceiling issue in the United States eventually won through.
Billionaire hedge fund manager John Paulson has taken a big punt on the gold share and its recent discovery of gold at the La Colosa mine in Colombia has been described as a “company maker”.
Since taking charge in October 2007, Cutifani has been credited with a number of significant operational performances, including the removal of its hedge book by October 2010. Without the hedge book in place the gold miner has been able to benefit from the rising gold price.
One area where Cutifani’s business acumen can most clearly be judged is at the free cash flow levels of the business. When he took charge the figure was around US$500m but had risen to near $1,7bn in its last financial year.
Andrew Marshall
(Nampak [JSE:NPK])
earnings multiple: 13
Dividend yield: 4%
Marshall is the classic intrapreneur, having developed fishing group Oceana into a quality listed offering and now trying to repeat his formula at Nampak. When Finweek started polling industry experts his was one of the first names to come up, with many pointing out how he has aggressively started to cut out non-core operations at the packaging group. As they say, the proof is in the pudding.
Analysts point out in a relatively short space of time Marshall has managed to reduce the group’s overall net debt from a touch more than R3bn to R1,2bn and grow operating margins at a time when the packaging sector is under severe pressure.
Experienced stock-picking teams, such as 36One and Kagiso, have bought into the story and we think there’s some merit in looking at this unloved counter for future growth prospects.
Julian Roberts
(Old Mutual [JSE:OML])
earnings multiple: 10,9
Dividend Yield: 3,6%
Roberts and Old Mutual have had their fair share of criticism over the past few years. Nobody would have thought one of South Africa’s most recognisable financial services companies could be a sub-R5 share that wouldn’t be paying a dividend – but it got there.
It isn’t easy to take charge of a company in the midst of a global financial meltdown, but give credit where credit is due: the number-cruncher in Roberts put a halt to the ego-fuelled expansion plans in places such as China and has methodically begun simplifying the Old Mutual group and focusing again on the “old-fashioned” savings business.
Value investors are seeing long-term opportunities in Old Mutual and if it sticks to the simple/stupid model it appears to be moving towards then investors will enjoy long-term benefits.
Sifiso Dabengwa
(MTN Group [JSE:MTN])
earnings multiple: 18
Dividend Yield: 3,5%
While former MTN CEO Phuthuma Nhleko grabbed all the headlines – and much of the kudos – for growing the company into a world-beater, many forget he was ably assisted by Sifiso Dabengwa over the past eight years in the role of chief operating officer.
Dabengwa is now in the hot seat and industry insiders see him as a more than capable pair of hands. Bearing in mind he has held senior roles at MTN during that massive growth spike, he’s worth backing going forward.
MTN on its own is a compelling technology play and even if you’re paying 18 times historical earnings you have a multi-national group with a global footprint and sustainable long-term earnings. We kicked around a couple of technology ideas for this portfolio and kept coming back to MTN.
Hubert Brody
(Imperial Holdings [JSE:IPL])
earnings multiple: 9,6
Dividend Yield: 3,5%
Imperial has been on the receiving end of a fair amount of criticism over the past few years as it had to come to grips with the global financial crisis. Having said that, the group has received plenty of praise for the way it’s restructured its portfolio and was a popular choice with asset managers we spoke to.
When value investors such as the Nedgroup Rainmaker Fund and RE:CM are buyers, you’ll find Imperial difficult to ignore. As pointed out, investors in Imperial get world-class brands, relatively defensive investment characteristics and, most importantly, strong cash flows. It’s hard to go wrong with a business like this when it’s trading on a single digit earnings multiple.
Clifford Ross
(City Lodge Hotels [JSE:CLH])
earnings multiple: 17
Dividend Yield: 4,41%
Paying 17 times historical earnings for a tourism business is hard to swallow and we took some real convincing to get this stock into our portfolio. While asset managers such as Vestact have long argued this isn’t simply a Soccer World Cup story, it’s been difficult to find out what its catalyst is for growth.
However, when you see both value managers and dividend investors getting in on the story you have to see some value there. A closer look shows a well-managed balance sheet and, as leading small caps analyst Shawn Stockigt, of Stanlib, points out, you want management with experience in taking a business through a variety of business cycles.
Ari Jacobson
(Vividend Income Fund)
earnings multiple: 12
Dividend Yield-Forward: 4%
No portfolio is complete without some kind of property in the mix. And while the natural inclination is to go with one of the more established players, we see investors doing better going with Ari Jacobson and the Vividend Income Fund.
While Vividend is a relatively new listing, it’s already attracted high profile asset managers, including RE:CM, Element and Investment Solutions, to its offering. You don’t build a business and get around to selling it to Bidvest unless you have a really compelling and well-run company – and that’s exactly what Jacobson had in the form of Master Currency, which he built up over 12 years. Coupled with KK Combi, this management team is a formidable one on paper.
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-management 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 world-class leaders looking after your capital.
Dictionary definition of an intrapreneur
“An employee of a large corporation who is given freedom and financial support to create new products, services, systems and does not have to follow the corporation’s usual routines or protocols.”
Ivan Clark
(Grindrod [JSE:GND])
earnings multiple: 8
Dividend Yield: 3,85%
(Chemical Specialities [JSE:CSP])
earnings multiple: -1,36
Dividend Yield: 0,52%
Neither Grindrod nor ChemSpec can currently claim to be in the good books of investors. However, there are plenty of reasons to trust Clark’s judgment and we’ve taken a double gamble on him by including both Grindrod and ChemSpec in our portfolio.
Clark has always voted with his wallet and was a consistent buyer of Grindrod in its early life stage. All shareholders scored on the way up and we must remember Grindrod still has some big projects bubbling under, including ports operations and a promising financial services and banking business on the go. At eight times historical earnings and a decent dividend, it’s hard to ignore.
ChemSpec is the “swing for the fences” small cap inclusion in our portfolio. As chairman, Clark is unlikely to tolerate any questionable corporate governance issues that often plague small caps. If he gets it right this portfolio could be a generous outperformer.
Mark Cutifani
(AngloGold Ashanti [JSE:ANG])
earnings multiple: 44
Dividend Yield: 0,52%
We thought long and hard about including a gold stock in our growth portfolio but sovereign debt issues in Europe and the debt ceiling issue in the United States eventually won through.
Billionaire hedge fund manager John Paulson has taken a big punt on the gold share and its recent discovery of gold at the La Colosa mine in Colombia has been described as a “company maker”.
Since taking charge in October 2007, Cutifani has been credited with a number of significant operational performances, including the removal of its hedge book by October 2010. Without the hedge book in place the gold miner has been able to benefit from the rising gold price.
One area where Cutifani’s business acumen can most clearly be judged is at the free cash flow levels of the business. When he took charge the figure was around US$500m but had risen to near $1,7bn in its last financial year.
Andrew Marshall
(Nampak [JSE:NPK])
earnings multiple: 13
Dividend yield: 4%
Marshall is the classic intrapreneur, having developed fishing group Oceana into a quality listed offering and now trying to repeat his formula at Nampak. When Finweek started polling industry experts his was one of the first names to come up, with many pointing out how he has aggressively started to cut out non-core operations at the packaging group. As they say, the proof is in the pudding.
Analysts point out in a relatively short space of time Marshall has managed to reduce the group’s overall net debt from a touch more than R3bn to R1,2bn and grow operating margins at a time when the packaging sector is under severe pressure.
Experienced stock-picking teams, such as 36One and Kagiso, have bought into the story and we think there’s some merit in looking at this unloved counter for future growth prospects.
Julian Roberts
(Old Mutual [JSE:OML])
earnings multiple: 10,9
Dividend Yield: 3,6%
Roberts and Old Mutual have had their fair share of criticism over the past few years. Nobody would have thought one of South Africa’s most recognisable financial services companies could be a sub-R5 share that wouldn’t be paying a dividend – but it got there.
It isn’t easy to take charge of a company in the midst of a global financial meltdown, but give credit where credit is due: the number-cruncher in Roberts put a halt to the ego-fuelled expansion plans in places such as China and has methodically begun simplifying the Old Mutual group and focusing again on the “old-fashioned” savings business.
Value investors are seeing long-term opportunities in Old Mutual and if it sticks to the simple/stupid model it appears to be moving towards then investors will enjoy long-term benefits.
Sifiso Dabengwa
(MTN Group [JSE:MTN])
earnings multiple: 18
Dividend Yield: 3,5%
While former MTN CEO Phuthuma Nhleko grabbed all the headlines – and much of the kudos – for growing the company into a world-beater, many forget he was ably assisted by Sifiso Dabengwa over the past eight years in the role of chief operating officer.
Dabengwa is now in the hot seat and industry insiders see him as a more than capable pair of hands. Bearing in mind he has held senior roles at MTN during that massive growth spike, he’s worth backing going forward.
MTN on its own is a compelling technology play and even if you’re paying 18 times historical earnings you have a multi-national group with a global footprint and sustainable long-term earnings. We kicked around a couple of technology ideas for this portfolio and kept coming back to MTN.
Hubert Brody
(Imperial Holdings [JSE:IPL])
earnings multiple: 9,6
Dividend Yield: 3,5%
Imperial has been on the receiving end of a fair amount of criticism over the past few years as it had to come to grips with the global financial crisis. Having said that, the group has received plenty of praise for the way it’s restructured its portfolio and was a popular choice with asset managers we spoke to.
When value investors such as the Nedgroup Rainmaker Fund and RE:CM are buyers, you’ll find Imperial difficult to ignore. As pointed out, investors in Imperial get world-class brands, relatively defensive investment characteristics and, most importantly, strong cash flows. It’s hard to go wrong with a business like this when it’s trading on a single digit earnings multiple.
Clifford Ross
(City Lodge Hotels [JSE:CLH])
earnings multiple: 17
Dividend Yield: 4,41%
Paying 17 times historical earnings for a tourism business is hard to swallow and we took some real convincing to get this stock into our portfolio. While asset managers such as Vestact have long argued this isn’t simply a Soccer World Cup story, it’s been difficult to find out what its catalyst is for growth.
However, when you see both value managers and dividend investors getting in on the story you have to see some value there. A closer look shows a well-managed balance sheet and, as leading small caps analyst Shawn Stockigt, of Stanlib, points out, you want management with experience in taking a business through a variety of business cycles.
Ari Jacobson
(Vividend Income Fund)
earnings multiple: 12
Dividend Yield-Forward: 4%
No portfolio is complete without some kind of property in the mix. And while the natural inclination is to go with one of the more established players, we see investors doing better going with Ari Jacobson and the Vividend Income Fund.
While Vividend is a relatively new listing, it’s already attracted high profile asset managers, including RE:CM, Element and Investment Solutions, to its offering. You don’t build a business and get around to selling it to Bidvest unless you have a really compelling and well-run company – and that’s exactly what Jacobson had in the form of Master Currency, which he built up over 12 years. Coupled with KK Combi, this management team is a formidable one on paper.
