Due Diligence
Your due diligence is probably wrongGlobal Advisors: a consulting leader in defining quantified strategy, decreasing uncertainty, improving decisions, achieving measureable results.
Our latest perspective - What's behind under-performing listed companies?
Outperforming through the downturn
Covid-19
Breaking Covid-19 / Corona-virus pandemic news, how to lead
Quantified Strategy
Decreased uncertainty, improved decisions
Global Advisors is a leader in defining quantified strategies, decreasing uncertainty, improving decisions and achieving measureable results.
We specialise in providing highly-analytical data-driven recommendations in the face of significant uncertainty.
We utilise advanced predictive analytics to build robust strategies and enable our clients to make calculated decisions.
We support implementation of adaptive capability and capacity.
Our latest
Thoughts
Global Advisors’ Thoughts: Outperforming through the downturn AND the cost of ignoring full potential
Press drew attention last year to a slew of JSE-listed companies whose share prices had collapsed over the past few years. Some were previous investor darlings. Analysis pointed to a toxic combination of decreasing earnings growth and increased leverage. While this might be a warning to investors of a company in trouble, what fundamentals drive this combination?
In our analysis, company expansion driven by the need to compensate for poor performance in their core business is a typical driver of exactly this outcome.
This article was written in January 2020 but publication was delayed due to the outbreak of Covid-19. Five months after South Africa’s first case, we update our analysis and show that core-based companies outperformed diverse peers by 29% over the period.
Management should always seek to reach full potential in their core business. Attempts to expand should be to a clearly logical set of adjacencies to which they can apply their capabilities using a repeatable business model.
In the article “Steinhoff, Tongaat, Omnia… Here’s the dead giveaway that you should have avoided these companies, says an asset manager,” (Business Insider SA, Jun 11, 2019) Helena Wasserman lists a number of Johannesburg Stock Exchange (JSE) listed shares that have plummeted in recent years.
In many cases these companies’ corresponding sectors have been declining. However, in most of the sectors there is at least one company that has outperformed the rest. What is it about these outperformers that distinguishes them from the rest?
The outperformers have typically shown strong financial performance – be that Growth, ROE, ROA, RONA or Asset Turnover – and varying degrees of leverage. However, performance against these metrics is by no means consistent – see our analysis.
What is consistent is that the outperformers all show clearly delineated core businesses and ongoing growth towards full potential in these businesses alongside growth into clear adjacencies that protect, enhance and leverage the core. In some cases, the core may have been or is currently being redefined, typically through gradual, step-wise extension along logical adjacencies. Redefinition is particularly important in light of the digital transformation seen in many industries. The outperformers are very seldom diversified across unrelated business segments – although isolated examples such as Bidvest clearly exist in other sectors.
Analysis of the over- and underperformers in the sectors highlighted in the article shows that those following a clear core-based strategy have typically outperformed peers through the initial months of the downturn caused by the Covid-19 outbreak.
Strategy Tools
Strategy tools: Effective transfer pricing
So much has been written about transfer pricing. Yet it remains a bone of contention in almost every organisation. Transfer pricing is not merely a rational challenge – it often raises the emotions of internal service users and providers who argue regarding scope, quality, price and value.
We have found that effective transfer pricing relies on some fairly simple best practices and critical success factors.
Many organisations recover costs as a regular ‘below-the-line’ deduction from operating division income statements. In our experience, charge out is almost always preferable. This results in internal value judgements and negotiation regarding delivery happening closer to time of use.
We have typically seen that the realisation that internal pricing plays this role and the consequences of poor implementation are not well understood.
Results of poor transfer pricing implementation
Sub-optimal economic use decisions
Where costs / prices are higher than they should be, buyers pass this on as an inflated cost to their customers, experience margin squeeze, or utilise less of the service than they might have.
Strategically this can lead to incorrect decisions regarding the provision of services to the market and loss of market share.
Where costs / prices are lower than they should be, this can lead to overuse of a product or service and poor cost recovery from external customers.
Strategically this can result in the over promotion and sales of products and services that are achieving lower margins than thought, or that might even be making losses.
Sub-optimal investment and resourcing decisions
Incorrect pricing can lead to over- or under-investment in capacity and product or service quality. Further, the resourcing decisions will be incorrect should the price signal to the supplier be incorrect.
Political and emotional argument
Where buyers are unable to obtain assurance that an internal price is correct, there is typically resentment regarding the cost of the internal product and service and the sheltered position employees of the internal service provider occupy – in the buyer’s eyes free from commercial pressures.
Buyers and suppliers typically also argue regarding the quality of the service or product relative to the price paid.
Suppliers may react to criticism claiming their product or service is strategic in nature and refute its availability in the external markets.
Poor product / service quality
Poor price signals will result in lack of comparable product and service quality benchmarks. This can result in ‘gold-plating’ or poor-quality product and service provision.
Read more at https://globaladvisors.biz/2021/01/06/strategy-tools-effective-transfer-pricing/
Fast Facts
Fast Fact: Great returns aren’t enough
Key insights
It’s not enough to just have great returns – top-line growth is just as critical.
In fact, S&P 500 investors rewarded high-growth companies more than high-ROIC companies over the past decade.
While the distinction was less clear on the JSE, what is clear is that getting a balance of growth and returns is critical.
Strong and consistent ROIC or RONA performers provide investors with a steady flow of discounted cash flows – without growth effectively a fixed-income instrument.
Improvements in ROIC through margin improvements, efficiencies and working-capital optimisation provide point-in-time uplifts to share price.
Top-line growth presents a compounding mechanism – ROIC (and improvements) are compounded each year leading to on-going increases in share price.
However, without acceptable levels of ROIC, the benefits of compounding will be subdued and share price appreciation will be depressed – and when ROIC is below WACC value will be destroyed.
Maintaining high levels of growth is not as sustainable as maintaining high levels of ROIC – while both typically decline as industries mature, growth is usually more affected.
Getting the right balance between ROIC and growth is critical to optimising shareholder value.
Selected News
Quote: Brian Tracy
“Your thoughts, vividly imagined and repeated, charged with emotion, become your reality.”? Brian Tracy
Polls
What determines your success?
We need your help!
We’re testing how people think about their successes and failures. It would be great if you would take 2 minutes to give a simple multiple choice answer and share the poll with your friends.
Take the poll – “What determines your success?”
Then read So You Think You’re Self Aware?
Services
Global Advisors is different
We help clients to measurably improve strategic decision-making and the results they achieve through defining clearly prioritised choices, reducing uncertainty, winning hearts and minds and partnering to deliver.
Our difference is embodied in our team. Our values define us.
Corporate portfolio strategy
Define optimal business portfolios aligned with investor expectations
BUSINESS UNIT STRATEGY
Define how to win against competitors
Reach full potential
Understand your business’ core, reach full potential and grow into optimal adjacencies
Deal advisory
M&A, due diligence, deal structuring, balance sheet optimisation
Global Advisors Digital Data Analytics
14 years of quantitative and data science experience
An enabler to delivering quantified strategy and accelerated implementation
Digital enablement, acceleration and data science
Leading-edge data science and digital skills
Experts in large data processing, analytics and data visualisation
Developers of digital proof-of-concepts
An accelerator for Global Advisors and our clients
Join Global Advisors
We hire and grow amazing people
Consultants join our firm based on a fit with our values, culture and vision. They believe in and are excited by our differentiated approach. They realise that working on our clients’ most important projects is a privilege. While the problems we solve are strategic to clients, consultants recognise that solutions primarily require hard work – rigorous and thorough analysis, partnering with client team members to overcome political and emotional obstacles, and a large investment in knowledge development and self-growth.
Get In Touch
16th Floor, The Forum, 2 Maude Street, Sandton, Johannesburg, South Africa
+27114616371