As we correctly forecast in last year's Top Companies Top Performers, the composition of the top 10 and beyond was likely to change considerably if the rand remained strong. A strong rand militates against resources stocks, many of which had done well in previous years as a result of the weakness of the rand. Some quality industrial stocks have clawed their way up the rankings. And some smaller companies - some would say lower-quality companies - are also making their presence felt.
Only five shares from last year's top 10 stayed there - Grindrod, Mvelaphanda Resources, Mittal (formerly Iscor), Inmins and Metair. Gone are Pals, Premium Properties, Cashbuild, Messina and Wesco. The precious metal stocks are conspicuous by their absence and last year's winner Mvela is now hurdling some tough historic comparisons, which makes it a lot more difficult for it to stay ahead of the pack.
Mittal is suffering from the same problem, dropping from fourth to seventh.
Though still impressive, Mvela's five-year internal rate of return (IRR) has declined from 136% to 97%. Mvela does have a juicy dividend yield of more than 14%, which should help it retain its investor attraction.
Grindrod's performance is nothing short of outstanding. It's become the darling of the JSE in the past year or so, riding the wave of a sustainably strong global shipping market. Grindrod deserves a round of applause because this is the first time in a long while that a company has reached the rarefied heights of number one in our ranking based purely on the merit of its underlying earnings growth, devoid of any distortions caused by low starting bases.
The key driver for Grindrod's longer-term growth prospects remains Chinese demand for steel imports.
Though the Chinese economy has been deliberately cooled, it's still growing at a phenomenal pace and a "soft landing" is expected. The only thing that would dampen prospects significantly is if there were a sudden slowdown of construction investment in China. The company is confident of further strong earnings growth and the p:e of 7,5 is hardly demanding. A weaker rand would provide a further kicker to earnings.
Scharrig Mining makes it to number three from 25th last year. This is a classic case of a penny stock made good.
Three years ago it was trading at 35c. By the middle of March this year, it had risen more than tenfold, peaking at 375c. Since then it's dropped back sharply, presumably because its revised trading statement forecast strong, though significantly reduced, earnings growth for this financial year.
The company derives its income from a combination of opencast mining, mining rehabilitation, earthworks and mining services. Its financials are not illuminating reading, but at the present share price it's sitting on a p:e of just less than 8.
Provided the share price stays at or around present levels, the huge momentum built up over the past three years should help it maintain its ranking.
Apart from Scharrig, four other stocks have come from nowhere into the top 10 - Brandcorp from 22nd to 4th, Iliad from 24th to 5th, KG Media from 36th to sixth and Goodhope from 139th to ninth. Though just outside the top 10, Sovereign Foods and Gold Reef came soaring through the rankings, from 197th to 12th and 113th to 13th.
Brandcorp has raised its profile with the investment community considerably in the past couple of years. In line with many other small-cap stocks, Brandcorp management may have looked at the possibility of delisting when its share price was much lower than the present price, but that's unlikely to be a consideration now. All three divisions - tools & hardware, leisure & accessories and house & home - have benefited from feelgood factors flowing from the housing boom and higher disposable income, which has translated into buoyant consumer spending. The strong rand has also helped because many of Brandcorp's products are imported.
Poultry product producer Sovereign Foods was one of the best performers on the JSE last year, rising by more than 300% in calendar 2004. The main reason for Sovereign's excellent profit growth was the significant reduction in the cost of maize, the biggest single cost factor for any poultry producer. Sovereign's peers in the sector - Astral Foods and Rainbow Chicken - also had strong share price growth last year, though nowhere near as strong as Sovereign. Rainbow leapt from 96th to 16th, but Astral doesn't as yet have a five-year listing history on the JSE, hence its absence from the list. Watch out for next year, though.
Gold Reef is reaping the benefits of buoyant consumer spending, some of which is being gambled in their casinos. Sun International, too, moved up the rankings sharply, from 137th to just outside the top 100, at 104. Recently listed gambling group Peermont will have to wait for almost five years before it is eligible for inclusion in this ranking.
Also in the hotel arena, but without the gaming component, City Lodge managed another fine performance last year, rising from 64th to 38th. Its market capitalisation has risen dramatically in the past two years and the stock is firmly back on the radar screens of the investment institutions.
Recently, Sun International (SI) announced that it was selling its 38,6% stake in City Lodge, not because it didn't like its investment but because it was sharpening its focus on casinos and resorts and City Lodge doesn't fit that profile.
In terms of the agreement between City Lodge and SI, City Lodge founder and nonexecutive chairman Hans Enderle has a pre-emptive right to acquire SI's stake and has until July in which to exercise this right.
Enderle has been actively exploring methods by which this stake can be taken up and the most likely scenario would be for an empowerment company to join forces with Enderle in acquiring the stake.
Anecdotal stories abound about the telephone lines to City Lodge head office in Sandton being overloaded with inquiries from interested parties, with names as diverse as Gold Reef, Peermont, Mvelaphanda, Johnnic and even Bidvest being mentioned.
Tsogo Sun's hotel subsidiary Southern Sun would be the obvious choice for a suitor but the competition authorities might view this in a different light.
Enderle has appointed Standard Corporate & Merchant Bank to advise on the matter. "I am confident City Lodge's success will continue unabated," says Enderle
Some huge declines occurred, probably the most notable being Messina, which tumbled from ninth last year to 109th this year.
The building supplies merchants - Cashbuild, Dawn and Iliad - displayed some different movements in this year's rankings. Cashbuild fell back, but both Dawn and Iliad soared through the ratings, though it's probably fair to say that they have similar five-year IRRs - Iliad at 77% and Cashbuild and Dawn on 55% and 56% respectively.
So, where are the retailers in this ranking? After all, they've all been riding the wave of higher consumer spending, driven by lower interest rates and a strong rand for at least the past couple of years.
Excluding Cashbuild, which is not categorised as a retailer, the highest-placed retailer is Connection Group, whose most familiar brand is the chain of IT retail outlets called Incredible Connection. It moved up from 172nd to 28th, with its five-year IRR soaring from 6% to 51%. Next, perhaps somewhat surprisingly, is Woolworths, rising from 151st to 37th in the ranking, with its five-year IRR rising from 11% to 44%.
Edcon is the largest listed retailer by market capitalisation and its share price has more than quintupled in the past two years - yet its five-year IRR is a relatively pedestrian 35%, much the same as last year's. It fell in the ranking, from 55th to 63rd. Truworths, on the other hand, moved from 152nd to 81st, its IRR rising from 11% to 30%.
Foschini's IRR almost doubled, from 12% to 23%, moving it up from 143rd to 118th in the rankings. Pick 'n Pay's IRR was stable at 21% and it fell back slightly, from 115th to 123rd. Its peer in the food & drug retailers sector, Shoprite, has a similar IRR and ranking.
The second-largest retailer in the sector - JD Group - just manages to scrape into the top 200, with a pedestrian 8% IRR. But that's likely to improve significantly in future, as the poor IRRs from a few years ago fall off and are replaced by much stronger recent ones.
Massmart doesn't make it into the rankings yet because it hasn't been listed for five years.
