How you would have found the top performers for 2014

Craig Martin.
Craig Martin.

Telkom [JSE:TKG] is one of the best performers over the past year, up around 140%. Ironically, small-cap Sekunjalo Investments [JSE:SKJ] was another stellar performer, up 135% over a year. Other good movers have been Zeder Investments [JSE:ZED] and Pallinghurst Resources [JSE:PGL], both with around a 65% one year change. Naspers [JSE:NPN] was up the same percentage, but has since pulled-back to a respectable 55% gain for the year. However all of the above mentioned companies have something in common. This shared characteristic could be the key to their relative out-performance of the JSE All Share, which achieved just shy of 11% over the same period.

An assumption that any value investor makes is that company’s actual value and value in the market will eventually converge in the long run. Of course, to determine the actual value a company you have to measure value using some set standard and one method is price to book. There are many ways to value a business, but one thing is certain that price to net current asset value (stripping out intangibles) is about as conservative of an intrinsic valuation measure as you can get.

All of the companies mentioned at the outside had very low price-to-book ratios (PB) twelve months back. Generally, this could signal a share that is currently undervalued. Unfortunately, nothing is ever that simple, as a low PB could also mean that something is fundamentally wrong with that particular company.

Value manager, Piet Viljoen, of RECM, has commented that he likes to find value by looking at PB (price to book), but then he measures the PB against return on equity over the long run and the current PE (price to earnings). The low PE and low PB, with good average return on equity could signal a great investment opportunity.

Being able to make cool rational decisions is a learned temperament that investors seeking to obtain alpha have to hone. A year ago, Telkom (TKG) might not have looked attractive, then trading at around 2600c, but Telkom’s NAV was at around double that value, this is still after the company made some significant write-downs in previous financial years. The PE was very low, but it probably wouldn’t have ticked the ROE block. But, if you brought on low PB and low PE, you have been handsomely rewarded.
Sekunjalo’s was also trading at around half of its NAV a year ago. That gap in PB has since closed with to the extent that SKJ is now at a slight premium to book, with a PB ratio of 1.1.

Some might argue that Zeder’s [JSE:ZED] performance could be attributable to a good increase in HEPS, mainly on the back of Pioneer Food’s growth, but the fact remains that it is valued on its net asset value. Zeder was at a nice discount to NAV, and the NAV adjusted higher. Currently, its sum-of-the-parts value is 749cps, still a 8,4% discount to the current trading price of 691c. However, you would expect the share to trade at a discount, as PSG take a 2% management fee on NAV, plus a 10% performance fee.

Pallinghurst’s net assets as at the interim report for 30 June 2014 was sitting at $519,7m, which is approximately R5.7bn. Pallinghurst trades on a market-cap of less than R3,4bn, which implies that the share still trades at  a discount to NAV of around 40%.

There is an argument that Jupiter Mines (steel operations) and Sedibelo Platinum are slightly overvalued. These were recorded at values of $73m and $215m respectively, even if you discount them by 25%, the share is still trading at a 30% discount to NAV.

I would submit that Pallinghurst should trade at some discount to NAV as the company as there are investment management fees of around 1.5% that get siphoned off annually. There is also the normal operating expenses, like audit fees and directors emoluments. However, I would think that a discount of 10% should allow for these expenses with some comfort.

It has often been said that an investor buying Naspers today is really getting the rump of the business for nothing, or alternatively paying for the rump and getting Tencent at a huge discount. Remember that besides Tencent, there is the pay-TV, print assets, internet businesses, which includes the valuable classifieds portfolio. The fact is that Naspers, arguably one of the best three-year performers on the JSE, has moved-up only the back of its price to book. The reason some analysts are recommending values as high as 220000c for Naspers is purely on net current assets, or PB.

The granddaddy of value investing, Benjamin Graham, wrote in his seminal book, The Intelligent Investor; “It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of stocks at a price less than the applicable net current assets alone… the results should be quite satisfactory.” Quite simply, I think that is how you would have found the top performers in 2014.

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