The booming resources sector has underpinned strong returns by listed Western Australian companies in WA Business News’ fifth annual survey of total shareholder returns.
The booming resources sector has underpinned strong returns by listed Western Australian companies in WA Business News’ fifth annual survey of total shareholder returns.
The top performers in this year’s survey are led by two companies that epitomise the current boom conditions.
Paladin Resources is developing the world’s first major uranium mine in 25 years and is poised to benefit from the extraordinary spike in uranium prices.
This has resulted in its share price rising from just a few cents five years ago to more than $4 presently.
Another company looking to exploit the boom conditions is aspiring iron ore miner Fortescue Metals Group.
Led by the indefatigable Andrew Forrest, FMG keeps on defying the sceptics as it moves closer to develop-ing its massive $3 billion Pilbara mining and infrastructure project.
FMG and Paladin are yet to earn a dollar from mining, yet they are among WA’s top six companies when ranked by market capitalisation.
Evidently investors attach more value to their potential, as opposed to the proven performance of mature companies such as Aquarius Platinum, LionOre Mining Inter-national and Iluka Resources.
Investors who bought Paladin shares five years ago have enjoyed average annual returns of 169 per cent, according to total shareholder return (TSR) calculations by Aspect Huntley.
Investors in FMG are not far behind, having enjoyed average annual returns of 133 per cent over the past five years.
While Paladin and FMG have led the way, the resources sector as a whole has been very strong over the past few years.
This was highlighted by Deloitte’s WA mining index, which tracks the value of WA’s larger listed mining companies. The WA mining index increased by 390 per cent between May 2000 and June 2006.
That put it well above the 217 per cent gain in Deloitte’s overall WA index over the same period of time.
There is a similar pattern at a national level, albeit with much lower returns.
The S&P/ASX 300 Resources index increased by 249 per cent between May 2000 and June 2006, while the All Ordinaries Index rose by a modest 66 per cent over the same period.
To put this in perspective, it’s worth noting that the major international markets have gone backwards over the past six years.
The S&P 500 index in the US is down 10 per cent, the FTSE 100 index in the UK is down 8 per cent and Japan’s Nikkei index is down 5 per cent.
This year’s WA Business News TSR survey reveals that many listed WA companies have failed to share in the current boom.
Aspect Huntley calculated a TSR for more than 430 WA companies in the year to June.
Of these, only about 60 per cent delivered a positive return to investors.
Over a three-year period, the proportion of winners was slightly higher, with 70 per cent of listed WA companies delivering a positive TSR.
The winners over the past year include many stocks that have delivered stunning returns.
Companies including Strike Resources (formerly Fast Scout), IndoMines, GVM Metals and Axiom Properties have delivered returns of better than 1,000 per cent.
Typically, these extraordinary returns arise when small companies are coming off a low base and are affected by a restructuring, a change of direction or, as in Axiom’s case, a contested takeover.
Arguably the most commendable performance in the TSR survey is by mature companies that manage to deliver consistently high shareholder returns.
Prime examples include engineering and construction companies Monadelphous Group and RCR Tomlinson.
They will never sit at the top of the TSR performance tables because, as established companies, they won’t attract the speculative buying that pushes up the price of ‘blue sky’ stocks.
However the TSR calculation looks at more than just share price gains (or falls).
It also takes account of dividend payments, capital returns and any other corporate events that affect returns to shareholders.
TSR is widely accepted among Australian companies, which often employ it as one of their key performance measures.
In particular, it is often used to assess the performance of chief executives and determine their bonus entitlements.
Monadelphous has prospered from the resources boom, highlighted by its ability to win two contracts this year from BHP Billiton worth $300 million. This has led to higher profits, a higher share price and increased dividend payments.
The end result has been an average annual TSR return of 74 per cent over the past five years.
RCR has also prospered during the boom and has used its success to fund multiple small acquisitions around the country.
Investors evidently like the company and its prospects, pushing the share price strongly higher during the past 12 months.
This has translated to an average annual TSR return of 93 per cent over the past five years.
Mining contractor Macmahon and drilling services contractor Ausdrill are other examples of companies o have seized the opportunities presented by the resources boom to deliver strong earnings growth and impressive returns to their shareholders.
The TSR survey also highlights the difficulty of maintaining top quartile returns over a long period of time.
Fleetwood Corporation, for instance, was a top performer over the five years to 2004 but has slipped down the rankings.
Despite strong demand from retirees and mining companies for its park homes, its profit performance has slipped and its share price has been lacklustre.
This has resulted in a TSR of 16.1 per cent over the past year and 23.9 per cent over the past three years.
Wesfarmers has experienced a bigger slide, posting a TSR of minus 7.2 per cent in the year to 30 June.
As a result, its average annual return over the past three years slipped to 21.7 per cent.
The negative return last year reflected the slide in its share price over the past year, partly offset by dividend payments.
Wesfarmers’ weak share price stems from investor concern about the lack of growth opportunities, which seemed to be borne out by managing director Richard Goyder’s prediction that the group was likely to experience a fall in net profit in the 2006-07 financial year.
