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Steinhoff is not the JSE’s biggest loser

Construction companies are the bourse’s real dogs.

A year ago, Steinhoff International Holdings was trading on the JSE at over R60 per share. It is now changing hands at under R2 per share.

The calamitous drop in the share price following Markus Jooste’s resignation as CEO has been the most significant event on the market for years. Close to R200 billion was wiped out of the company’s market capitalisation.

What makes this loss of value so eye-catching is that it happened so suddenly. In August last year, Steinhoff was still trading at over R90 per share. By the end of December, it had fallen to under R5.

Remarkably, however, Steinhoff is not the JSE’s worst performer over the last few years. If one looks at current stock prices and compares them to five-year highs, two construction companies actually top the list.

Source: Sasfin Wealth

This graph was tweeted on Wednesday by David Shapiro, deputy chairman at Sasfin Wealth.

He noted that: “Not all the weakness on the JSE can be blamed on the emerging market sell-off. In a number of cases, flawed strategies and poor judgment have added to the declines.”

Over the last few years, the troubles at these construction companies have continually compounded. The latest hit to Group Five was the judgment last week in the Johannesburg High Court that Ghanaian company Cenpower Generation could proceed with a $62.7 million (R875 million) claim against the group.

Read: Group Five loses battle to stop call on bonds

Group Five’s total market capitalisation is now just R63 million. It reported a net loss of R1.3 billion for the six months to the end of June this year.

Fallen angels

What is also interesting about the list is the appearance of a number of former market darlings. Consolidated Infrastructure Group, Ascendis Health, Brait, Anchor and EOH all enjoyed periods of robust share price growth as investors found a lot to like about them, followed by rapid declines as sentiment changed.

Ascendis is one of the more interesting cases. The health and wellness group listed on the JSE in November 2013 at R11 per share, and a market capitalisation of R2.5 billion. By March last year, the counter had increased to over R23 per share, giving Ascendis a market capitalisation of more than R10 billion.

At that point, many analysts were still praising its rapid growth and apparently successful acquisition strategy. However, within a few months, more and more questions were being asked about what challenges the company’s spate of acquisitions might be hiding as its return on equity started to drop materially.

The company’s share price has since fallen to under R4.50, and its market cap is a little over R2 billion. That means that Ascendis is now worth less than it was when it listed five years ago.

Pulling up the Anchor

Another company that has experienced a remarkable rise and fall is Anchor Group. The financial services group listed on the JSE in September 2014 at R2 per share, and was already trading at R3.50 by the close of the same day.

By the end of 2014, the counter had risen to over R7 per share, and peaked at R18.50 just 14 months after it listing. Buoyed by the company’s rapid growth in its assets under management and revenues, investors were enthused.

However, when shares are priced for perfection, any disappointment is going to be felt hard. Unfortunately for Anchor shareholders, that is exactly what happened.

In a poor return environment, Anchor’s asset management and hedge fund businesses struggled to deliver convincing performance, and profits began to slip as margins were squeezed. By April 2017, the group’s share price had fallen back to under R7, and at the start of 2018 it was below the R3.50 it had reached on its first day of trading.

It remains near those levels today.

Lessons for investors

This list makes for pretty sorry reading. In a return environment that is already weak, these companies have only made things even worse for those investors who held them in their portfolios.

In hindsight, it’s easy to say that these shares should have been avoided, but that is a lot easier said than done. Particularly when companies have apparently been performing well, the risks are often disguised.

For investors, however, a key approach would be to keep an eye on a business’s cash flow and return on capital. Even though earnings may be growing, these metrics can highlight concerns.

Read: How to avoid investment bombs

Secondly, rapid growth in a share is wonderful on the way up, but it is also a risk. If sentiment runs ahead of fundamentals and a company gets priced at particularly demanding multiples, it has to keep producing incredible performance to sustain that.

If it doesn’t, the deratings can sometimes be severe. That is why it is necessary to constantly re-evaluate an investment case to determine whether a share price is really sustainable, and be willing to take profits and walk away when the pendulum has swung too far.

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“Follow the smart money,” they told me….yeah right

I wonder how many MBA’s or BComm Acc sit on these boards???

And your point is? You are just as likely to find MBA’s and accountants on the boards of successful companies.

Comment board really needs to start rising from making snide comments on groups of people or individuals and maybe provide some interesting views on finance for a change. This is a fincial news site after all. Not You or Die Son.

Companies do not fail or succeed because they have women/blacks/CA’s/Afrikaners/Jews/Indians manages them. Most of the time it is probably factors beyond control of managers driving results, interest rates, commodity prices, currency, GDP account for a lot. Quite often poor acquisitions destroy value and sometimes poor strategic choices. Only a fraction of value destruction is due to out and out fraud.

Thank goodness – a reasoned submission Notwarren. Many of the comments published are breathtaking in their naivety, or just plain nasty. This is a professional website aiming to facilitate sharing of views and reasoned debate – can we not all align ourselves to this philosophy?

Having a different view is not a crime – as long as there is a reasoned logic behind the view expressed – that we can all potentially learn from…

Let’s rise above the mediocrity.

Not sure if this ever got off the ground but seems like a recipe for disaster. This article below came out end of April.

To keep classes full, Curro may give some parents loans to pay high-school fees
Phillip de Wet , Business Insider SA
Apr 30

There is a trend in business schools and universities to push out a narrative and products that lead to the type of behaviours you see that helped aid and abet state capture. It would seem that things like ethics and good governance are not the things that are cherished within business schools and SAICA.

You are right that there are many factors beyond the control of managers but you would be blind to not notice the trend and the lack of action against companies’ managers that go for the profit no matter what the cost.

To see Curro and Stadio in the graph of severe market losers is surprising if you work from the premise that public education is in a bad shape and space in good public schools is limited, and that generally parents will look for good school education.

Or is Curro just a bit more expensive version of public school, perhaps better run but just another version towards the same matriculation system which is under suspicion? That is, in business terms, does Curro not offer a readily identifiable alternative, yet charge more for the offering?

Alternatively (or in conjunction perhaps) the economic downturn is likely to put high school fees out of reach for more and more households.

Hesitate to mention this, but from a pure business analysis perspective, it would be in Curro’s interest if the old Model C public schools decline, to force more clientele to Curro schools.

Whatever it may be, it is ominous that apparently the darling of the large-scale private schooling option with the semi-affordable model, is apparently not trusted for growth and profit by the investment market?

Also battling to get my head around why Curro has declined so much. I bough into it to play the theme of the private sector taking over services that the state cannot provide anymore. I still believe that theme holds. Also believe Curro schools are very well run.

Just not so sure how strong the free cash out of Curro will be on a “steady state” basis. I think I missed a trick there and did not do my analysis properly. Maintenance capex remains quite high. Possible solution would be to list a separate property company holding the schools and do a sale and leaseback.

Really interested in sensible views on this. Please do not respond if your theory is that it is all a giant conspiracy by the Afrikaners from SBos or that the country is doomed for evermore and that the ANC will chase all white people into the sea tomorrow. There are plenty of other threads for that indentity political bile.

I have always viewed it as being rather expensive with the P:E making it rather pricy. In the long run probably still a good business, just taking longer to get the profits up.

Education is part of politics, but education should not be politicised. However, politics and public education affects a company whose business is education and is to be considered in the discussion of its shareprice.

The Curious Case of Curro is nothing about conspiracies – it is just a pure and simple interesting business case that was an investors’ darling with high expectations and has apparantly lost its lustre. The growth projections were probably losing sight of the fact that the ability to afford education outside the public school system has a limited audience, and is susceptible to fluctuations in the household spending capability e g fuel price, municipal accounts, price of electricity, rising medical costs and so on has a direct impact on the level of school fees which can be paid and shrinks the potential market.

And it remains a fact that there is a significant sector of the Curro potential market (people who can afford the higher school fees) residing in “Model C”-schools (Affies, Waterkloof, Paarl Gimnasium, DF Malan and numerous others, as well as the many Boys and Girls Highs across the country) many of which has fees not far off from Curro schools and thus the business, Curro, has a nut to crack to set itself apart with a more visibly alternative product that warrants a premium price.

At the same time Curro has the affordable segment participation with Meridian and in bed with PIC as investor, thus linked to government, which in conjunction with government’s stranglehold on curriculum through legislation and being able to revoke school registrations, limits Curro’s ability to move towards a more independent and identifiable alternative product: a business limitation and possibly even a risk as long as the “Model C”-schools keep performing and are even expanding (increasing market share).

Notwarren:

Curro runs on the same formula as Steinhoff (and others) : keep on buying so that the organic numbers are impossible to analyze.

Also of concern is the BS the board comes up with. I served on a private school board and know the numbers. There is no way on earth Curro can generate the kinds of return on capital they promise – only schools that receive much of their asset base by way of donations can generate good returns on capital. Curro was buying assets at top prices. Even when you have virtually free asset base, the big expensive item is good teachers and that ratio to their claimed cheaper private school fees in combination mean this business can maybe make a few % profit on revenue.

They kept on ‘buying’ assets with an inflating share price – no lender would have financed those assets. So sure, if you view shares as free capital then Curro can work. But there was no way on earth the operations could ever service its shareholders.

Please dont show this graph to Magnus…Hahaha

@ Disselboom – Why would government revoke school registrations when it (PIC) stands to earn returns from doing the opposite?

@Crackerjack – that is the point of speculation that Curro is caught between the need to go more independent with a true alternative education option for business basics of a distinctive and recognisable product at the risk of upsetting government at their efforts to centralise and control all education, while being in bed with government (PIC) as a major investor and a Curro/ Old Mutual/ PIC deal for so-called affordable private schooling in Meridian. Business and politics does not blend well.

Don’t want to upset @Notwarren with theories, but it is interesting to observe that (1) Curro is highly exposed to schools registration (by government) and (2) they went outside (to the lower market) their original model of the type of schools that is their core business in a deal involving PIC (and others – Old Mutual? investing outside their core business).

Not intended as critisism, but observing that to do large-scale business in today’s South Africa has its interesting moments – and investors have their views, since they are not into philantrophy, but investing for profit.

…. and the necessity for being a legislative compliant registered school, shaping business between school operations and the real estate facilities ownership and whether rent is paid (with VAT on top) between school and property entity and how it all affects VAT and thus the bottomline of the fee amounts is quite interesting.

The JSE is one huge ponzi scheme and all a con. In my experience with Steinhoff before the bubble burst when so called experts were queried about it or recommended it you could see a clear pattern emerge. Jump from one news channel to the next Businessday or CNBC AFrica etc and all these individual commentators were spewing out the same facts almost word for word as if they had all been emailed a script that they were reading off. To be fair there was an exception but most people all said the same things.Then Steinhoff collapsed and suddenly they were all dumbfounded. YEah right the con artists all got conned by the Master himself. I now truly believe that the JSE companies and shares are all a manipulation as proven by the auditors all now being exposed too. This is an enrichment scheme for the Boardmembers and large shareholders and we all jsut get suckered to invest hard earned cash into this big fat Ponzi scheme manipulated by the owners of the game for their own selfish enrichment. Keep this in mind next time you want to invest or listen to an expert financial advisor! Net asset values and earnings per share are all false. Corporate south africa and all the auditors not only KPMG are rotten to the core and just out for self enrichment.Add the lawyers and Banks to the game. Its just all a fraud.

This is like telling someone that has had a heart attack that they are lucky they don’t have cancer!

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