Should companies diversify or focus their activities? It's an old debate to which there will not be any final answer. It depends on individual circumstances, and aspects such as company life cycles and how the market rates the various assets in a group.
Yet when companies unbundle or sell non core assets, the results tend to support the arguments for focus ed companies. Shares of two companies that followed this route in the past year, Tiger Brands and Afrox, have been significantly rerated relative to the industrial sector.
Both these groups have produced consistent growth in EPS and dividends, but since the late 1990s the shares have often traded at p:e ratios below the industrial index average.
Since Tiger unbundled its stake in Spar in October last year, Spar's share price has risen from 1 940c to 2 955c, increasing its market capitalisation by R1,7bn, to R5bn.
Despite the reduction in Tiger's asset base, its own share price has risen by 63% over this period, with its market cap climbing to R23,8bn, almost R10bn more than it was immediately after Spar was spun off. The bull market has helped and trading conditions have improved, but it may not be entirely coincidental that the p:e is now 14,4, above the industrial index average of 13,9.
Afrox sold most of its stake in Afrox Healthcare in a black economic empowerment deal, and distributed the R2,1bn net proceeds to shareholders. The high-growth health-care division had been an important contributor to Afrox's performance over 10-15 years.
Afrox's market cap this week was almost R9bn, close to a record high. The p:e, at 18,3, was well above the market average. Even on 12-month forecast EPS, based on the I-Net Bridge consensus, the stock is highly rated on the 2006 forward p:e of 14,6.
Anglo American's share has gained almost 20% in the weeks since October 26, when management announced results of its strategic review.
The new strategy includes an intention to reduce Anglo's stake in AngloGold Ashanti, an option to establish unlisted paper and packaging group Mondi as an independent business and other potential disinvestments.
Some analysts criticised the announcement for its vagueness. Surging precious metals prices have helped to lift Anglo's share since then. But investors do seem to have benefited from the board's new willingness to make structural changes to unlock value.
In considering such moves, boards will tend to balance potential short-term value against longer-term considerations. Investors are often sceptical about diversified groups, but will usually look firstly at performance and at whether underlying assets are consistently undervalued.
Bidvest's diversified structure continues to generate good financial results, though the share has had periods of underperformance. In time, perhaps under different management, even this group could opt for structural change.
Food and aluminium group Tongaat-Hulett is considering ways of unlocking value, at Anglo's behest.
Mvela Group's share has risen in recent months but the price, at R8, is still below the year-end 835c NAV, as at June 30. Its portfolio could be a candidate for strategic review if a value gap continues for too long.
Similarly, if Barloworld's share continues to severely underperform its listed cement and lime subsidiary PPC - as it has done for the past four years - it may come under increasing pressure to reshape its portfolio.
