USA Corospondent - July 2017

Quarterly Publication - July 2017

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Quinton Ivan

Quinton Ivan

Quinton is Head of Coronation's Core Equity Strategy. He also co-manages the Presidio Hedge Fund. Quinton has 19 years of investment experience.

“Success leaves traces.” – Sir John Templeton

Quality businesses possess certain attributes that make them long-term winners: enduring competitive advantages (such as the franchise value of brands or a store footprint that is hard to replicate), robust and adaptable business models, good cash flows and excellent returns. These characteristics often result in such businesses compounding revenue and earnings at a higher rate than expected – and the market rewarding this superior growth with a premium rating when compared to the average company. However, one attribute that is often overlooked when assessing a business’s track record, is the role played by management. While most companies are heavily subject to the macroeconomic conditions of the day, good management make things happen and get on with the job of driving shareholder value.

In his excellent book, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, author William Thorndike attempts to identify the key traits and methods of eight CEOs. Each is responsible for delivering exceptional shareholder returns, which ultimately results in their companies handsomely outperforming both their peers and the market. We are fortunate to have many examples of truly exceptional businesspeople in South Africa, who have created enormous value for shareholders over time. Similar to Thorndike, I consider two South African case studies in an attempt to identify what it is that makes the managers in question so special.


Saad is one of South Africa’s great entrepreneurs. His first job in 1989 was at a startup, Quickmed, a small medical wholesale business operating mainly in townships around Durban. Quickmed later merged with Zurich, which was bought by Prempharm (now Adcock Ingram) in 1993 for R75 million. Saad, who was 29 years old at the time, made approximately R20 million on the deal. Not resting on his laurels, he teamed up with Aspen’s current deputy CEO, Gus Attridge, later that year and together they bought a stake in Varsity College, which was struggling at the time. They turned the educational business around, partly through innovative marketing offering students a refund on tuition fees if they failed their courses, provided that they attended all of their lectures. Saad and Attridge sold their stake in Varsity College to Leisurenet in 1997 for R100 million – they had bought it for R1.5 million.

Aspen listed on the JSE in 1998 via a reverse listing into Medhold. Shortly after, it launched a hostile takeover of South Africa Druggists (SAD), acquiring the old Lennon drug business (a pioneer in generic medicines) as well as a manufacturing plant in Port Elizabeth.

Today, Aspen has successfully transformed from a South African generic pharmaceutical company into a global player focusing on anticoagulants, anaesthetics, high potency pharmaceuticals and cytotoxics, and infant milk formula in both developed and emerging markets.

Since listing, revenue and normalised headline earnings per share have compounded at close to 40% per annum, through a combination of acquisitive and organic growth. More recently, Saad has concluded large deals with GlaxoSmithKline (GSK), Merck and AstraZeneca, which has seen it become a significant player in the highly specialised therapeutic classes of anticoagulants and anaesthetics. This has been the culmination of years of relationship building and a focused strategy to internationalise the business and focus on niche, post-patent products that are complex to manufacture.

A few things about Saad stand out throughout Aspen’s successful history:

  • A passion for the business and an unwavering ambition to globalise. The following quote from Aspen’s 1999 annual report is noteworthy: “The group recognises the advantages to the internationalisation of its business in today’s global economy. The development of this strategy will be off the base of a successful and stable domestic operation.”  
  • Having conviction in his strategy and betting big, even in the face of market scepticism. Noteworthy deals over the years include:  
  • acquisition of SAD in 1999 for R2.4 billion – still regarded by Saad as the riskiest deal he has ever done;  
  • two deals with GSK in 2008 and 2009 for R7.3 billion;  
  • acquiring Sigma Pharmaceuticals in Australia in 2011 for R5.9 billion;   acquiring Merck’s anticoagulant portfolio and manufacturing sites for R10 billion; and  
  • the recent acquisition of AstraZeneca’s anaesthesia portfolio for approximately $770 million.

While investors are typically wary of acquisitive growth and tend to find more comfort in lower-risk, organic growth strategies, Saad has delivered on all of these transactions. Aspen’s acquired businesses are highly cash generative and the group has simplified the manufacturing process of acquired product portfolios, delivering – and in most cases exceeding – promised synergies.

  • Acting like an owner. Saad owns 12% of Aspen and has never sold a share. Despite the enormity of recent transactions, equity has only been issued on two occasions:  
  • the SAD acquisition in 1999, where the immature balance sheet was geared 4.7 times – the maximum lenders would allow; and  
  • the GSK transaction in 2008 and 2009, where GSK insisted on a partial share offer as a condition of the deal (GSK ended up with a 16% stake in Aspen at the time).  

As an owner, Saad understands that equity is precious and an expensive source of funding (if you believe your business is undervalued), as any issued shares need to be serviced, via dividends, in perpetuity.

  • Surrounding himself with good people. While Saad is clearly a special individual, and Aspen will be a poorer business without him, he has ensured that each major geographic hub is run by a capable management team that is empowered to act. He also has a very strong deputy in Attridge – himself a significant owner – who deserves credit for the financial structuring and integration of these various acquisitions.


Crutchley established his reputation as a top-tier manager in his role as managing director of Consol, the glass-packaging manufacturer, from 1998 to 2002. During this time, Consol was delisted and significantly restructured – Crutchley’s tenure was characterised by focused investment in plant, improved marketing efforts and rigorous cost management. The result: Consol dominated the South African glass market, and the once loss-making plastics division turned profitable. Revenue grew by 10% per annum and profits doubled over this five-year period – an admirable result in a mature, highly competitive industry.

In 2002, Crutchley became the business development director of AVI. He took over as CEO in 2005. This coincided with AVI transitioning from an industrial conglomerate to a focused branded consumer goods company. As part of the transition, AVI sold Vector Logistics, unbundled Consol and acquired Spitz and Green Cross. While much of this happened prior to Crutchley’s appointment as CEO, he was instrumental in shaping the group’s new strategic direction given his role as business development director.

Under Crutchley’s leadership, brand portfolios were aggregated to leverage off shared services, thereby saving costs. He also invested heavily in plants, marketing and innovation efforts to grow key product categories. Productivity metrics were benchmarked against international best practice, and any shortcomings were addressed. In addition, Crutchley demonstrated good discipline on capital allocation, walking away from numerous potential deals as he was not prepared to overpay. Excess cash was returned to shareholders in the form of share buybacks and special dividends. This was in stark contrast to peers that paid up handsomely for similar assets, or to expand their footprint into Africa – a strategy that ultimately ended up costing shareholders dearly.

Crutchley’s standout strengths as CEO are:

  • An extremely disciplined approach to capital allocation. Underperforming assets that could not be fixed were disposed of (Alpesca, Denny and Sir Juice). He also walked away from numerous potential acquisitions for which vendors had unrealistic price expectations, and invested heavily in existing product categories where he believed returns could be enhanced. The result was an increase in return on equity from 13% to 27% from 2005 to 2016.  
  • A razor-like focus on shareholder returns. Crutchley ensured that AVI returned excess cash to shareholders by consistently increasing the ordinary dividend payout, share buybacks and special dividends.  
  • Tight cost control. However, this is coupled with a willingness to invest in entrenching and growing brands and product categories to enhance returns.  
  • Judicious price management. This ensures that value market share is protected and maximised.  
  • Rigorous talent management. Control is reasonably centralised and divisional managers are given scope to execute their strategies – but are quickly removed if they underperform. Between management changes, Crutchley has often stepped in to run and fix underperforming divisions.  

While I have used Saad and Crutchley to identify the key attributes I believe make them special, they are by no means the only examples of exceptional business leaders in South Africa. Several others readily spring to mind:

  • Koos Bekker, former CEO of Naspers. Bekker is a visionary and has successfully identified megatrends and shifts in technology very early on. This has allowed him to transform Naspers from a predominantly South African pay TV and print business into a globally significant company focused on its core verticals of media, e-commerce and classifieds.  
  • Pat Goldrick, former CEO of Cashbuild. Under Goldrick’s stewardship, Cashbuild was repositioned from a business dependent on government’s erratic infrastructural spend to one of the country’s most successful discounters of building materials, servicing the neglected informal trade. What makes this achievement all the more impressive is that Goldrick had very little formal education (he had a poor Irish upbringing and never completed high school). His success came from pure determination, relentless focus on customer service and good old-fashioned hard work.  
  • Adrian Gore, current CEO of Discovery Holdings. Gore is a true entrepreneur who is not afraid to challenge the status quo. He is a major proponent of innovation and of using data analytics to disrupt well-established industries such as private healthcare funding, short- and long-term insurance and, more recently, retail banking.  
  • Kevin Hedderwick, former CEO of Famous Brands. Hedderwick created a culture of operational excellence across Famous Brands’ key platforms of food services and logistics, which still endures today. This enabled the business to offer its franchisees exceptional service and value. It also allowed additional brands to be plugged into the existing supply chain infrastructure, thereby transforming what was Steers Holdings into the enviable portfolio of quick service restaurant brands it is today.  

While these individuals are by no means homogenous – some are born entrepreneurs, while others are highly skilful managers – they have certain common qualities:

  • They have enormous shareholder focus. More often than not, these people are significant owners of the businesses they run and guard the value of that equity jealously.  
  • They are prepared to think big, act big and follow through on their convictions if they believe these to be correct. They do so even when it may be unpopular with the broader investment community.  
  • They are focused. While their control is often centralised, they have an intimate knowledge of all underlying operations.  
  • They are highly strategic. But they are also prepared to roll up their sleeves and get stuck in to fix and turn around underperforming operations.  
  • They are very good allocators of capital. They are prepared to invest if it enhances shareholder returns, but will otherwise return excess cash to shareholders.

Warren Buffett is famous for saying that he prefers to buy businesses that are so wonderful that an idiot can run them because sooner or later, one will. There is some truth to this statement – after all, a business with good fundamentals and average management is preferred over a business with average fundamentals run by good management. However, there are several examples in our market that prove that exceptional people have generated outsized returns for shareholders in both good and average businesses. Once you identify these special people, back them and you will be rewarded handsomely.

This article is for informational purposes and should not be taken as a recommendation to purchase any individual securities. The companies mentioned herein are currently held in Coronation managed strategies, however, Coronation closely monitors its positions and may make changes to investment strategies at any time. If a company’s underlying fundamentals or valuation measures change, Coronation will re-evaluate its position and may sell part or all of its position. There is no guarantee that, should market conditions repeat, the abovementioned companies will perform in the same way in the future. There is no guarantee that the opinions expressed herein will be valid beyond the date of this presentation. There can be no assurance that a strategy will continue to hold the same position in companies described herein.