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4 minute read
22 Nov 2018
7:23 am

Steinhoff is not the JSE’s biggest loser


Construction companies are the bourse’s real dogs.

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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.

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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