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Covid-19 / the Coronavirus

 

The latest and selected content on Covid-19 / the Coronavirus and how to lead.

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Global Advisors’ Thoughts: Outperforming through the downturn AND the cost of ignoring full potential

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.

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Fast Fact: Some of your business segments are destroying value – which?

Fast Fact: Some of your business segments are destroying value – which?

By Stuart Graham

Key insights

We often see uncertainty in our clients about whether to focus on RONA or growth. While both are obviously important, which will create the greatest value for their companies and shareholders?

We introduced the market-cap curve to help answer this question by plotting the well-known valuation equation for combinations of RONA and growth at a constant valuation.

RONA / growth combinations along the curve preserve the company valuation. Combinations above the curve increase the valuation and combinations below the curve decrease the valuation.

It is easy to see from the graph that companies with high RONA and low growth will benefit more from growth improvements while companies with low RONA and high growth will benefit more from RONA improvements.

The market capitalisation curve provides a useful boundary for capital allocation when business segment performance are plotted against the curve.

ANY performance improvement of ANY business unit raises the aggregate performance and therefore moves the curve outwards – i.e. increases company value.

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Strategy Tools: Growth, Profit or Returns?

Strategy Tools: Growth, Profit or Returns?

By Stuart Graham and Marc Wilson

Stuart is a manager and Marc is a partner at Global Advisors.
Both are based in Johannesburg, South Africa.

Growth, profit or returns? It’s all three, however we find that the relationship between these and shareholder value creation is poorly understood – if at all.

All three measures become critical to the way forward as companies navigate the Covid-19 crisis.

After ensuring business survival, navigating through the Covid-19 crisis requires returns on invested capital AND growth to deliver shareholder returns. S&P 500 companies averaged 13% RONA and 5% revenue growth (CAGR) through the financial crisis (2008-2012) .

Monolithic survival approaches may starve compensating growth opportunities – a portfolio approach is required.


Key insights

Returns are not enough – companies must also grow to create value.

Profits and cash flows cannot increase indefinitely through cost-reduction, efficiency, business mix, etc – top-line growth is critical.

Returns must be above costs of capital to be value accretive.

S&P 500 companies averaged 13% ROIC and 5% revenue growth (CAGR) through the financial crisis (2008-2012).

Margins and revenue growth, or even profit growth in themselves don’t answer that question of whether shareholder value was created or destroyed. There are many examples of where growth and high margins actually destroy value.

Company valuations reflect an aggregate of their business portfolio – rebalancing segments based on their growth and return profiles can lift company value.

Growth requires investment – at the very least in the working capital required to support revenue growth.

Measuring RONA or ROIC and Revenue growth shows whether business activity is value accretive or destructive.

You can use the Global Advisors Market Cap (valuation) framework to map your business – and agree action to deliver improved shareholder returns.

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Fast fact: A quick change in Covid-19 plots shows when countries turn the tide

Fast fact: A quick change in Covid-19 plots shows when countries turn the tide

Aatish Bhatia – in collaboration with Minute Physics – did an amazing job of visualizing the Covid 19 data. His logarithmaic juxtaposition of total versus new cases shows when the virus growth begins to slow.

  1. Logarithmic plotting of new vs total cases shows when infection rates (as measured) slow
  2. When plotted in this way, exponential growth is represented as a straight line that slopes upwards
  3. The x-axis of this graph is not time, but is instead the total number of cases or deaths
  4. Notice that almost all countries follow a very similar path of exponential growth

You can choose the numbers to plot at Covid trends

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The latest and selected content on Covid-19

The latest and selected content on Covid-19

Updated every 15 minutes, 24 hours a day, 7 days a week.

The latest and selected content on Covid-19 / the Coronavirus and how to lead – globaladvisors.biz/covid19.

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Covid-19 – Johns Hopkins University

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