Ben Temkin
28 August 2008
column
Johannesburg — AMONG the most frequent e-mails I have received about the Private Investor portfolio have been those from readers concerned about the disappointing performance of the price of the shares they have bought.
My repeated comment has been that provided the investment fundamentals of the company remain intact, the share price will, over time, adjust to the fundamentals.
Grindrod's share price and earnings growth correlation was, I feel, an object lesson. Much the same, of course, applies to Afrox.
The difficulty some of the correspondents have, in common with Jean and me, is that they are using the investment fundamentals to achieve earnings returns in excess of the rate of inflation. They realise that the failure of the share price to move up reflects that the real rate of return they want is not being achieved.
Being told that they should remain patient is not always, the e-mails tell me, much consolation, especially when the rate of inflation is now solidly in double figures.
Consider Afrox as another object lesson. Seven years ago in late August 2001, you could have bought the share at R10,40. About a month later they were traded at just above R9. On paper, you would be down about 14% excluding transaction costs. By holding on until the peak of R37, your paper gain would have been an average annual gain of 38%.
Now at a share price of R26,50, the average annual gain would be 14,2%.
Bear in mind, too, that you would have received two special dividends amounting to R4,75 a share. If you regard this as an extra bit of share price, your paper annual average gain over seven years would be 17%.
On the share price benchmark, you would have well beaten inflation by about seven percentage points.
But, as I wrote yesterday, because we bought Afrox shares for the portfolio at R32,79, we're not expecting a real rate of return - earnings return in excess of the inflation rate - until the financial year 2010. However, this outlook could be conservative, especially when considering the company's return on assets managed.
The drivers to push up the return on assets and, in turn, the return on equity, are the company's asset turn (the ratio of turnover to assets) and the operating margin (the percentage return of operating profit to turnover).
Both these drivers have scope for improvement.
In the 15 months to December , the net asset turn was only 1,8 times, well below the two and better than it achieved in several of the previous six financial years. And we know only too well that much of the reason was lack of capacity and work in progress to build capacity.
Its operating margin at 18% was, however, higher than in the previous financial years , for reasons I mentioned yesterday, falling to 16,8% in the latest six- month period.
It could well improve again in this current half. Is this enough consolation?
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