Top 200's return on equity rankings

The return on equity (RoE) table – one of the Top 200 “flagship” tables – this year caused a good deal of consternation among the brains trust at McGregor-BFA.

It’s easy to see why when glancing at top-ranked company SABMiller, which is accorded a latest RoE of more than 7 000% and a five-year RoE of -668%.

But please allow us to explain – lest readers’ accuse Professor Leon Brummer and his team of imbibing too much of SABMiller’s golden nectars during the late nights spent compiling the Top 200 tables.

In fact, that “anomaly” involving SABMiller reiterates the point we try stressing every year: that it’s critical for readers to understand our calculations (detailed at the front of this publication) and that some rankings must be taken with a pinch of salt.

Back to SABMiller

McGregor-BFA’s calculation of RoE includes SABMiller’s cost of control.

That intangible asset is reflected as close to $9m (R67bn), which is understandable when considering the slew of acquisitions made by the brewer since taking up its primary listing in London.

Basically, what McGregor-BFA’s calculation is emphasising is SABMiller paid more for those “brand rich” beer brewing companies than the respective companies’ book values.

“Technical” exchange rate issues also further skew the RoE calculation for SABMiller.

Finweek and McGregor-BFA debated whether we should recalculate SABMiller’s RoE to take those factors into consideration.

Because SABMiller is certainly an exception rather than the rule we opted to stick with our original calculations – even if the table’s top ranking is more a technical issue than a fundamental one.

Once again, both our RoE and return on assets (RoA) tables throw out more than a few surprises.

We’re sure most punters would be surprised to see stragglers such as Absolute Holdings, Faritec, Super Group, John Daniel Holdings, Purple Capital and Finbond holding Top 20 rankings for RoE.

Indeed, there are some very flattering rankings scattered throughout the RoE and RoA tables.

In that regard we have to recognise some companies don’t carry a massive chunk of capital on their balance sheet; others don’t hold a multitude of physical assets (mining equipment, truck fleets or warehouses full of baked beans).

A comparison, rather

As we’ve pointed out before, the RoE and RoA rankings shouldn’t really been seen as a merit order table.

Rather readers would probably find it far more useful to use the RoE and RoA measurements to compare companies in their respective sectors.

It may also be more prudent to measure returns over a five-year basis.

On a sectoral basis, the JSE’s retailers fared fairly well – although there might be some surprise registered at Spar’s 147% RoE over five years.

Retail conglomerate Massmart (53%), building supplies specialist Cashbuild (42%), fashion retailer Truworths (39%) also caught the eye in the RoE rankings over five years.

Technology companies also showed up well on the RoE rankings over five years, most notably (Gijima AST (175%), EOH (70%), UCS
(45%), Adapt IT (79%), ConvergeNet (109%) and Mustek (45%).

Old economy stalwarts – or the old industrial conglomerates – also looked in good shape on a five-year basis. Invicta achieved a five-year RoE of 35%, while Hudaco managed 36%.

Howden wasn’t far off with 26% and ArcelorMittal (the old Iscor steel group) recorded 19%.

As regards the traditional blue chips or JSE heavyweights, it was a mixed bag in the RoE rankings over five years.

BHP Billiton (29%) and Sasol (25%) looked solid enough but  Remgro (8,8%) and Anglo American (9%) looked a tad underdone.

Food giant Tiger Brands showed an astounding 60% RoE over five years, a performance that put its rivals in the shade.

In the RoA rankings it was no surprise to see so many technology counters – which traditionally don’t have sprawling asset bases – on the top rungs over one year.

Perhaps the most intriguing comparison was in the telecoms sector, where newly listed Vodacom (41%) edged out MTN (36%) over one year.

Remgro, which recently underwent a hectic restructuring involving the creation of new listings BAT and Reinet, understandably showed a 51% RoA over one year.

But, as we’ve said before, those returns – which reveal which companies are working their assets the hardest – are probably best measured over a longer term.

A longer look

In the five-year rankings, pharmaceutical group Aspen managed a RoA of more than 50%.

Restaurant franchisors Spur Corporation (53%) and Famous Brands (33%), as well as Kagiso Media (39%), MTN (33%), vehicle tracking specialist Digicore (30%) and City Lodge (32%), also deserve a mention.

Some of the more “asset heavy” counters to show up well over five years would include poultry group Astral (26%), fishing group Oceana (19,8%), Tiger Brands 26%), AVI (19%), Bidvest (18%), Howden (36%), Invicta (25%) and plastics packaging specialist Bowler Metcalf (31%).

Sasol was the king of the commodity heavyweights with a five-year RoA of 16%, just ahead of BHP Billiton (15) but well ahead of Anglos (6%).
 - Finweek

To view the Return on Equity Table, click here
To view the Return on Average Assets Table,click here
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