News Article -- April 26, 2004
Top 100 Companies That Gave The Best Returns
(source : The Edge Malaysia)by P Gunasegaram
Hot stocks get into the ranking
When the market gets hot and stocks can give returns of 10 times the original investment in three years, things change even when you compute returns over five years. The performance in just one year, sometimes, skews results for five years, our benchmark period to pick the overall Top 10. That was the case with this year's winner, Second Board company Crest Petroleum. Its 1-year rturn was five times the original cost of investment. That performance pushed its overall rank, using the benchmark 5-year period, to No 1. (For how we computed the ranking, see bottom.)
A combination of events, of which the main was Crest's coming of age as the concept play among oil and gas shares, was what put this company in the No 1 spot. But mind you, the earnings have not come through yet and there are some risks involved. But there still remains one thing in common among all these companies, the same that we saw the last time we computed the ranking — focus. For the last survey, the cut-off date was Sept 30, 2002. Our cut-off date this time around was Dec 31, 2003.
Companies that concentrated on what they do best gave shareholders the best returns. Crest may be a concept play but it is focused on its operations and concentrates primarily on oil and gas field services. Second-placed YLI Holdings is a very focused pipe manufacturer, as is eighth-placed Melewar Industrial Group or MIG. MIG was also helped in the ranking by the high dividend payouts it made in the past.
Third-placed IOI Oleochemical Industries is a major palm oil processor, and has ventured downstream into plantations, while fourth-placed Inti Universal Holdings is one of the best-known private educational institutions in the country. Both stick to what they know best. Hume Industries and Narra Industries, the former Hume Cemboard, (placed fifth and sixth, respectively) benefited from restructuring schemes within the Hong Leong group which unlocked value within these companies.
Seventh-placed ECM Libra, the former SPI Industries, deserves special mention. Its share price appreciated substantially on the reverse takeover by shareholders of ECM Libra, the boutique corporate finance group founded by the trio of Datuk Kalimullah Hassan, Lim Kian Onn and David Chua. BBMB Securities has been injected in as well and ECM Libra promises to be an emerging finance group that bears watching.
The final mentions in the Top 10 go to WCT Engineering (ninth place) and SP Setia (10th). The former is a construction group making waves not just locally but internationally, its latest claim to fame being the completion of a Formula 1 grand prix track in Bahrain ahead of schedule. SP Setia has now made a name for itself as a major property developer that takes the trouble to keep projects going at all cycles of the property development process, thus keeping a constant stream of case and profits flowing into the group.
Three of the Top 10 this time — IOI Oleochemicals, Inti and WCT — were in the Top 10 the last time too. There are some things that stand out in our analysis of the Top 100 and overall figures this time. One is that the returns are much better this time around for the benchmark 5-year period. That's because of the start date of Jan 1, 1999.
Those who follow the market will know that this was after the capital controls of September 1998 and jailing of former Deputy Prime Minister Datuk Seri Anwar Ibrahim, following which confidence in the market collapsed. On hindsight, that would have been a fantastic time to put money in the market because there was a sharp recovery in the market after the brutal slaughter earlier. And some brave ones would have reaped much reward if they had invested then.
Good performers in every sector
Companies in the Top 100 had a very impressive rate of return of at least 15% a year, measured by the compounded annual growth rate, or CAGR. That effectively means the investment would have at least doubled in value over five years. As heartening as this is, beware — not any company would have given great returns. Of some 680 eligible companies, at least 328 actually gave negative returns, with 120 of them losing as much as half their original investment cost. You can't go out there and buy stocks blindly even if your timing was right.
The other stand-out observation is that the Top 100 for one year was pretty difficult to predict — there is no discernible trend or common thread among the companies except that the bulk of them were smaller and rather riskier. For those interested in finance, those stocks may be termed high beta stocks, which move more than the market when it rises but also fall more steeply when it falls. There may be a case to invest in some of these high beta stocks, but remember, almost by definition, they are also higher-risk stocks.
But if your portfolio is well diversified and you chose your high-beta stocks carefully, your returns may still be enhanced. Which brings us to the next observation. If you look at the table which ranks the Top 10 by sector, it becomes obvious that the majority of them did well during the period. This would imply that it is possible to pick good performers from every sector, even if a particular sector may not be considered attractive over a particular period in time. That means a diversified and less risky portfolio is possible.
One would expect that with the start date for measurement being post the worst part of the Asian financial crisis, many of those in the Top 100 would be high-beta stocks but that just does not seem to be the case. Most of the Top 100 include the more traditional companies — those with solid businesses, excellent management, good market share and which focus on what they do best.
Some examples are Teh Hong Piow's companies such as Public Bank and Public Finance, Hong Leong group companies such as OYL Industries and Hong Leong Bank. Lee Shin Cheng's companies such as IOI Corp and IOI Prop in addition to IOI Oleo, Malayan Banking, Azman Hashim's AMMB group of companies, British American Tobacco and the like.
But when we look at the 3-year and particularly the 1-year tables, things are definitely changing. More small companies and Second Boarders are coming to the fore. Among the Top 100 for one year, just under 40 companies were Second Board companies, including one Mesdaq Market company. Will that be the trend for the future as the market continues its recovery? Perhaps. With the kind of returns they potentially give, it's hard to ignore them even if it is harder to see what they fundamentally have to offer.
Past experience shows that most high flyers do crash out in the end, handling those who still hold them a terrific wallop in the butt and more. But there is that window of opportunity, and if you are wise and astute enough to take that chance, you can lock in those gains.
Yes, we all aspire to do that, don't we? But how many succeed? How many have the discipline to let go when the stock is still climbing and still, by most accounts, has room to go? As the market recovers, one should expect that more second liners and concept plays will get into our benchmark rating but it will be interesting to see just how many will make the grade.
Diverse Opportunities
A breakdown of Top 10 companies by sector shows that the outstanding sectors were those on the Main Board. Second Board companies performed significantly worse. Particularly strong sectors were construction, consumer, finance, industrial products, properties, technology and trading services — which leaves few others out.
Those that were not particularly strong in performance were hotels, infrastructure, plantations, trusts and mining. What stood out was the performance of industrial product companies this year, taking about half of the overall Top 10.
How we computed the tables
There are many different ways to assess companies and their performance. We decided to take the easy way out — let the market be the arbiter.
Given a long enough time period, the market, assuming that it is reasonably efficient, should be able to process all the information about the company and give it a value. In the meantime, investors would also be receiving real returns from the dividends that the companies pay out.
We first took the share price of a company at the end of the period under consideration (Dec 31, 2003). We added all dividends paid during the period (10 years, five years, three years and one year) to the price.
Then we compared this figure with the share price at the start of the priod in review. For example, 10 years ago it would have been Jan 1, 1993, five years Jan 1, 1999, three years Jan 1, 2001, and one year Jan 1, 2003. If there was no trading on that day, then the next trading day was taken. The prices and dividends are adjusted for all rights and bonus issues.
We define shareholder returns over the period as the sum of the appreciation in share price and dividends as a percentage of the original start price. Then we compute the compounded annual growth rate for this, the average rate at which the investment appreciates every year to achieve the new price plus dividends paid.
we are aware that dividends are paid every year and not at the end of the period as we have assumed but to adjust for this would be too complicated to do for every company and every period. If dividends are paid out uniformly over the years, as they usually are, the rankings will not be skewed.
For those interested, the formulae are as shown below:
Shareholder returns: [(new share price plus dividends during period)/old price - 1] x 100%
CAGR (compounded annual growth rate): the Nth root of [(new share price plus dividends during period)/old price) - 1] in percentage terms. N is the number of years.
These figures are computed for all companies listed on the Kuala Lumpur Stock Exchange (now Bursa Malaysia) and the companies rank based on best shareholder returns, which implies best CAGR as well. We did this for 10 years, five years, three years and one year.
For our overall ranking, we decided to use the 5-year figures. If we had used 10 years, many companies would have to be excluded from the ranking as they would not have existed then.
Thus, to be eligible to be included in the rankings for best companies to invest in, they have to be around for at least five years. That period of time will also establish a long enough investment horizon for values to be realised/unlocked.