Ideally, this ranking measures the wealth-creating ability of companies listed on the JSE for at least five years.
In most cases it does: the internal rate of return (IRR) shows the total return on investment, measured by share price appreciation plus dividends (including special dividends) discounted back over five years – in this case, to year-end 2004.
A glance at the top 20 or so rankings illustrates just how well many companies have done for investors.
But this table is also very susceptible to “funnies”.
We try and identify them and explain why they’re there.
The funnies always creep in, but this year they seem in abundance.
Maybe its 2010 Soccer World Cup madness.
Whatever the reason why there are so many funnies ambling around the farm it offers the Mad Hatter good grounds for a discharge.
But overall, the broad trends are encouraging, especially considering the stock market gyrations of the past two years.
Financial crisis, stock rebound
No table is that the emerging market crises of 2001 falls off the back of the table.
What we have is three-and-a-half years of stunning returns as the bull charged up to mid-2008.
Then the global investment world caved in and we had a sharp correction on the JSE.
Also captured will be part of the strong return by the market up to end-December 2009.
That’s quite a ride and it’s reflected in the IRR percentages.
Last year the top rankings were below 120%, headed by African Dawn Capital (more on that later) with 119%.
This year the top three are all higher than 120%. It doesn’t match the boisterous returns of the 2008 table – headed by HCI with 153.1%, but latest IRR returns are nonetheless high.
That’s probably the effect of the market recovery creeping in towards the end of the calculation period.
Another way to look at top performance is how many companies had an IRR higher than 100%.
In 2008 there were 11 companies, last year only one and this year four.
That suggests when it comes to very top performance, returns are better this year.
Once again, it’s probably part of the equities market recovery.
But that only applies to the top performers.
More broadly, IRR percentages are down.
We use 50% as a very rough benchmark for excellence. On that basis, 62 companies exceeded 50% in 2008, 29 companies last year and 21 this year.
Enter the funnies
Let’s go to the top of the table: Firestone Energy, with 131.3%. “Firestone who?” I can imagine some readers asking.
It takes some explaining.
Firestone Energy is a Perth-based company registered in Australia.
It’s listed on the Australian Stock Exchange and on the JSE, its focus very much on mining exploration and development in Africa and specifically on coal prospects in the Waterberg coalfields in South Africa.
It’s had some success identifying and developing coal deposits in a joint venture with a South African empowerment company.
Now this writer gets irritated when the Australians come to SA and beat us at rugby and cricket, but it’s unforgivable they should sneak in and also claim top spot on the IRR table.
We had to speak to the ref about this one. He considered our complaint then cried foul.
It was actually thanks to the CIO of a South African asset manager who pointed out at the time of writing that he could remember Firestone Energy listing on the JSE but was sure it wasn’t five years ago, the time needed to qualify for the IRR table.
He was right. Somehow, Firestone Energy slipped through the net (maybe it’s been listed in Australia for more than five years).
It hasn’t been on the JSE for the necessary five years and is therefore disqualified.
However, what would have strongly influenced its high return is that it’s a very tightly held share that can move quickly on thin trades, its price going from 16c/share to 43c/share over a short period.
That makes Wooltru Ltd number one.
But again, it’s a funny.
Share price performance has been terrible but Wooltru earns the high IRR because of its 10c/share dividend payment on HEPS of 0.04c (a total of R47.1m to ordinary and N shareholders) as part of a capital reduction.
So it’s really a technicality under Woolworths Holdings, which despite solid share price performance and convincing latest financial results is way down the table at a lonely 153 spot, its IRR just 14.6%.
On to third-placed Dorbyl – and weird gets weirder.
It’s selling everything – only keeping, it seems, the business that makes components for the automotive industry.
It’s in the process of making lots of cash from the disposals but otherwise isn’t at all inspiring as an investment.
Its place on the charts goes back to earlier results.
Under current conditions it can be scratched off the list.
Finally, third-placed Cenmag.
This company – it makes electromagnets and motor rewinding as well as wholesaling electrical equipment – is there because its share price has advanced 458% over the past year.
It’s also a tightly held share that moves quickly on low volumes and after the unbelievable share price performance was put on the company to short list by our investment writers (14 January 2010).
Cenmag is under a cautionary announcement relating to a possible change of control and name change and will probably end up as a cash shell.
So much for that. This year’s table serves as an apt reminder that it’s not the companies at the top of the ranking that really count but those that have consistently maintained a relatively high ranking or can be seen to be moving steadily up the table.
Two companies that stand out this year are Howden Africa and Basil Read, respectively second and third in the rankings last year and now in positions seven and eight.
Both are solid companies: in fans and heat exchangers for Howden and building and construction for Basil Read.
IRRs above 70% have been rewarding for investors and both shares are still worth looking at.
We always preach consistency for this table and, sure enough, when you identify a company that seems to meet all the criteria – consistently and steadily advancing up the table – the wheels fall off and blow the theory.
African Dawn Capital (Afdawn) is the culprit here.
Second on the table in 2008 and first last year, its future looked bright.
Then there was a boardroom coup, interim results had to be restated and its share price plummeted by 86%.
Afdawn just makes the cut this year – spot 195 – with an IRR of 11.4%.
But going back to those companies with an IRR above 50% and there’s still potentially a lot of value.
Names worth watching include Pioneer Foods, Northam Platinum and Brimstone Investment Corp.
A little further down the notables are Kumba Iron Ore, Capitec (though we also put it on the short list following the strong run in its share price), Shoprite and Adcock Ingram.
Just for an idea of how well Whitey Basson is steering Shoprite and rewarding shareholders, consider that rival Spar is 53rd, while Pick n Pay and Woolworths Holdings are 141st and 153rd respectively.
That’s another way this table can be used to try and gauge who might remain the best investments: if operations and clients are similar in the same industries look at how competitors are ranked against each other.
The same could apply to primary material producers and major clients. With the dispute going on between Kumba and ArcelorMittal over a contract to supply discount-priced iron ore, note that Kumba is in 24th place with a not so bad IRR of 48.8% while ArcelorMittal languishes at 123rd, with an IRR of 19.1%.
Then there are the companies that aren’t rewarding shareholders and in some cases destroying value.
Though readers won’t see it in the table, if we take a cash return of 10% as a yardstick, place 203rd down to the final place at 384th are all below cash.
A more generous yardstick would be the top end of inflation at 6%: place 222nd and downwards are less than 6%.
IRR also goes negative from spot 246th downwards – and there are some surprising names here.
No doubt many are also funnies because promising shares are in this category.
However, the prominent names include Kap International, Lonrho plc and Liberty International plc.
More understandable are Sappi and Mondi: they will remain in negative IRR territory as long as both groups’ return on capital remains below cost of capital.
The Internal Rate of Return Table, click here