Afro Finance: Top 20 performing shares companies – a mixed bag

Written by Steven Bacher
Wednesday, 01 June 2011 12:15

(This is an archive item from our Issue 20 magazine - Ed)

“The Top 20 until now (February 2011) consists of a mixed bag of companies ranging from the obscure to the well known, from small to large, from consumer to business focused, and from the mainstream to the niche” says Craig Gradidge, director of investments at Gradidge-Mahura.


Leading the pack is little-known Cenmag Holdings, which is an investment holding company with subsidiaries primarily involved in the manufacture and servicing of electromagnets and motor rewinding, as well as in the wholesaling of electrical and related equipment.

“It’s a tightly held share, which makes it very illiquid and difficult for investors to get hold of stock,” says Gradidge.


The Top 20 index is dominated by consumer-related companies such as Shoprite, Clicks, Capitec, Truworths, Famous Brands (the owners of Steers, Mugg & Bean and others) and Mr Price. This isn’t surprising given the emergence and growth of the black middle class. As the economy grew and jobs were created and policies such as BBBEE (especially employment equity, ownership and management elements of the codes) took effect, this market saw disposable income increase significantly.


Added to this were positive effects from broader economic factors such as low interest rates and banks that were willing to lend for a large portion of the period under review. Clicks benefitted from a successful turnaround strategy, while Shoprite, Capitec and Famous Brands saw the market recognising their growth strategies and increasing their ratings.


Resource-related stocks such as Sacoil, Exxaro, African Rainbow, Assore and Village benefitted from conducive conditions for resources. Gradidge notes that, “Themes such as growing populations and the emergence of developing economies saw commodity prices increase quite dramatically over the period.” It appears as if size was not a key determining factor in performance, with minnows Awethu Breweries (R4 million market capitalisation) keeping company with retail giant Shoprite (R54 billion market capitalisation).


The market capitalisation or market cap is a measure of the size of a company and is calculated by multiplying the share price by the number of shares in issue. You may be familiar with Awethu’s products – they produce mageu and sorghum beer.


“As a drinker of mageu (banana flavour, of course), I can relate to knowing the product, but not the manufacturer,” says Gradidge.


The average market cap was R12 billion, although this is skewed somewhat by larger companies such as Shoprite, African Rainbow, Exxaro and Truworths.
A final observation is the relative valuations of these companies given their outstanding performance over the past five years. You probably want to know if you should be buying any of these companies now.


History is littered with examples of companies that fade into obscurity after a period of excessive share-price growth. The price-earnings (PE) ratio – which is the ratio of the price of the share relative to the earnings, or profit, per share – is a commonly used indicator of how expensive a share is. Again we see a mixed bag here with companies such as Capitec, Shoprite and African Rainbow looking quite expensive with PE ratios above 22 (this means that the investors are paying more than R22 a share for every R1 of profit).


However, companies such as Pinnacle Technology, Metrofile, Basil Read and Phoneworx are trading at PE ratios below eight (meaning that investors are paying less than R8 a share for every R1 of profit). It doesn’t mean that you should rush off and buy the low-PE shares because these are historical figures. Rather ask yourself where your see profits going for each company, and buy based on expectations and risk-tolerance levels.


A company may be cheap because profits are falling, while another maybe expensive – but profits are rising. Looking at the PE ratio alone may result in buying the wrong share. While we may kick ourselves for not having bought some of these shares five years ago, it’s important to remember that equity investing is not a race or a competition. Gradidge concludes by saying that, “Investing in the stock market is about wealth creation over many years and requires patience and clear thought if one is to be successful.”