The Top Companies award winners are the bluest of blue chips. The aim is to combine a good track record with a clear demonstration of likely future performance.
In deciding who should join the exclusive club of 20 Top Companies, the FM looks closely at the historical financial performance of the companies and assesses their prospects for the years ahead.
The financial performance is measured by BFA McGregor. BFA aims to eliminate inconsistencies in the way companies report their earnings by standardising treatment of the figures. So, for example, the way companies treat foreign exchange conversions is brought into a common formula. The same assumptions underlie all the financials in Top Companies (see Definitions, or see page 9 of print edition).
One of the objectives is to identify companies that have a consistent track record in their performances. Figures are considered over the long term - nearly one-third of the overall score is derived from a five-year assessment of internal rate of return (IRR) and compound growth in earnings per share. IRR measures the company on its returns to shareholders - both dividend flows and capital appreciation in the share price.
This long-term view means that only companies that have been continuously listed for at least five years are eligible to be one of the Top Companies winners. So inevitably some worthy candidates - Telkom, for instance - are knocked out. We also leave out companies with a market cap of less than R1bn to ensure that we consider as potential blue chips only the companies that have the mass to be real investment prospects. This year that left us with 111 candidates.
We rank those companies by quantitative analysis of their past financial performance. We then take the top 40 companies from that list as our finalists and subject them to an additional process of qualitative assessment.
For this we turn to the FM's team of specialist investment writers. They look at the 40 companies and score them on a range of criteria (click on table at right ). Each criterion is given a different weight. Specialist sectoral writers focus on their areas of expertise and then general companies writers consider the group and ensure that common standards are applied to all finalists.
The judges consider how the company is run (and is likely to be run) by assessing corporate governance and the strength of management.
For the past two years we have also considered commitment to empowerment as a key strategic driver for all SA companies. Here, we looked at what the company had done, not only in headline-grabbing deals, but also its broad contributions to empowerment through procurement policies and skills development.
A company may be profitable and well run, but we also have to consider whether the company is still a good buy (investability). To do that, we look at its current share price as well as the free float and volumes of trade in the share. Companies whose great prospects have been more than fully priced by the market will fall down on this criterion.
We consider the profit prospects for companies in two ways. First we look at the prospects for the sector they operate in. Then we measure the company against its peers in that industry.For example, resources companies are in an industry that is likely to continue battling against a strong rand. But a company such as BHP Billiton would score well on likely profitability relative to its peers, thanks to its diversity in both product and geography. On the other hand, retailing, banking and construction have great prospects, but a company may be marked down on its prospects relative to its peers.
The scores from the FM team count for 60% of the final score, with 40% based on the quantitative analysis. The weighting is to ensure that our winners are based primarily on a forward looking assessment. The companies that make the top 20 have not only done well, they are expected to continue to outperform.
Each year several companies that operate below the usual blue-chip radar screen, and perhaps don't trumpet their success, are scooped up by the Top Companies awards process. Examples this year are Aspen, Metair and Astrapak - companies that seldom make the headlines, but quietly run great operations.
The difference between the companies can be slight. Twentieth-placed Absa was ahead of the 21st company, Netcare, by a tenth of a percent. Other companies that were finalists, but did not make it into the top 20 are (alphabetically) AECI, Afrox Health, AVI, Ceramic, Clientele Life, Group Five, Hudaco, Iliad, Invicta, Italtile, Medi-Clinic, Mittal Steel, Omnia, Pikwik, Shoprite, WBHO and Wesco.
In the two years we have assessed performance, the Top Companies winners have always beaten the market, if only by small margins, indicating the thoroughness of our methodology.
- See this year's winners by clicking on the list at right.
