This business of sustaining growth...

Bigger companies here have a better chance at it

By TEH HOOI LING
SENIOR CORRESPONDENT 

MCKINSEY Quarterly had an article recently on the real picture of sustaining top-line growth. 'Many leaders set unrealistic growth targets,' the article noted. 'Often, they don't properly consider how fast their underlying markets are growing and thus how much market share must be grabbed to meet ambitious goals. Or they ignore the likelihood that their competitors are doing many of the same things to grow. They also underestimate the ongoing need to find new products to replace revenue declines from current offerings as they mature.'

A historical look at corporate performance puts the growth challenge into perspective. McKinsey showed the real revenue growth distribution for large non-financial companies from 1997 to 2007. The consultancy ended the analysis in 2007 to avoid distortion resulting from the severity of the recession that began that year.

According to its data, the median revenue growth rate was 5.9 per cent. About one-third of these companies increased their revenues at rates faster than 10 per cent. But that one-third figure probably overestimates organic growth, since it includes the effects of acquisitions, noted the consultancy.
It also presented a second chart which showed real 1965-2008 revenue growth for the 500 largest non-financial companies in the United States.

The median was 5.4 per cent a year. Although the rate fluctuated from one per cent to 9 per cent according to the economy's health, there was no upward or downward trend and thus no rising tide to lift growth over the longer haul, it noted.

During that period between 1965 and 2008, median GDP (gross domestic product) growth in the US was 3.2 per cent, meaningfully lower than the corporate revenue growth rate. The additional growth was a result of globalisation. As at 2008, 48 per cent of US companies' total revenues came from outside the country. That portion of the revenues has been growing much faster than their US revenues.

Many companies are counting on global growth, particularly in emerging markets, to go on driving them forward, noted McKinsey. But a rising number of companies around the world are competing for a share of that momentum, cautioned authors of the report.

Finally, they highlighted that there are a number of casualties of the growth game as well. According to them, beginning in the mid-1970s, a quarter of all the large companies it studied actually shrank in real terms in a given year. 'In fact, many mature companies will get smaller in real terms. In related research, we find that a startling 44 per cent of all companies that grew at rates faster than 15 per cent from 1994 to 1997 were growing at rates lower than 5 per cent ten years later,' it said.
The report made me curious about Singapore companies. How has the growth rate of Singapore companies been like over the long term?

So I downloaded the list of companies as at Dec 31, 1990, and their respective market capitalisations. At that time, there were 18 companies with market cap of $1 billion and above. I grouped them as the tier-one companies.

In this group are SIA, DBS, OCBC, UOB, Keppel, Hongkong Land, Jardine Matheson, SPH, City Developments, Dairy Farm, F&N, Jardine Strategic, Singapore Land, Asia Pacific Breweries (APB), OUE, Sembcorp Marine and Jardine C&C.

I then downloaded these companies' revenue per share, earnings, free cash flow (FCF), and dividend per share from 1991 until 2010. From there, I calculated the annual compounded growth rate of all these measures over 10-year blocks. Chart 2 shows the median growth rates of the various metrics for this group of companies.

As you can see, this crop of companies has done rather well. Their growth rates have accelerated rather sharply in the last five years. As at last year, the median compounded annual growths for their revenues, earnings, FCF and dividend per share were 9.8 per cent, 17 per cent, 20 per cent and 6.5 per cent respectively. That's higher than the numbers reported by the McKinsey study for US companies. But then again, our sample is small.

On the whole, it were the Jardine Group of companies, Keppel Corp, F&N and APB, Singapore Land and Sembcorp Marine which pulled up the averages. Among the banks, OCBC is the best performer with a 5.9 per cent growth in revenues per share and 9.3 per cent a year increase in earnings per share over the last 10 years.

The corresponding number for UOB is 2.7 per cent and 6.9 per cent. DBS is the laggard, with -0.8 per cent and -3.2 per cent decline a year in its revenue and earnings per share, compared with 10 years ago. It fared worse than SPH which has seen its market threatened by the emergence of new media. SPH managed to grow its revenue per share by 4.2 per cent a year in the last 10 years, and its EPS by 3.2 per cent a year.

Roughest patch

Among this group of companies, SIA is the one going through the roughest patch in the last two years. Its EPS has fallen by 4.3 per cent a year compared with 10 years ago.
Meanwhile, Hongkong Land, Jardine Matheson, and Jardine Strategic have the perfect record of chalking up positive FCF every year for the past 19 years. FCF is cash-generated by the business after deducting capital expenditure. As for APB, SPH and Dairy Farm, they only have one negative FCF year since 1991. All took place in the 1990s.

The next batch of stocks had market caps ranging from $166 million to $986.5 million. There were 34 of them back in 1991. In this group are companies such as Natsteel, UIC, Keppel Land, NOL, Hotel Properties, Great Eastern, Cerebos, Wheelock, United Engineers, Metro, Wing Tai, GP Batteries, Kim Eng, GK Goh, Yeo Hiap Seng, Lum Chang and Genting Singapore.

From the names you can guess that this group generally didn't do as well. Chart 3 shows the median sales, earnings, FCF and dividend per share of this group of companies for 10-year blocks since 2001. The performances are more patchy, possibly because there are quite a number of property stocks in there. But their earnings expanded healthily in the last five years, but not so the revenues.
Still the growth for all the metrics pales in comparison to that of the blue-chips companies.

In this group, the most consistent performer is Great Eastern Holdings. But even then, its growth has tapered off somewhat in the last three years. Great Eastern and Cerebos are the only two companies which have a perfect record of positive FCF every year for the last 19 years.
So there you have it. In a globalised world, larger companies - in the Singapore context - have a better chance of sustaining their growth. Although it is highly unlikely that they will repeat their 17 per cent median EPS growth a year for the next 10 years.

Because of their size and stability, this group of companies also generally trade at a premium. The way to get outsized return from them is buying them during a market crisis.
Meanwhile, the second-tier companies are not as expensively priced. If you are able to uncover a company which can hold its own and sustain its growth for a number of years, then you will be very well rewarded.

However, it is no easy task finding these companies. To me, buying blue chips in a crisis is much more straight forward. But always beware of any structural change that may have eroded their competitive edge.