By Ben Temkin

My plea yesterday for Raubex to report on defined management objectives, is a general plea to listed companies. The absence of these objectives doesn’t prevent investors from measuring a company’s performance but they are additional valuable information, especially when in trying to assess the management investment fundamental.

I like to use the return on assets managed as a performance gauge. Thus, when I wrote on Raubex in May, I noted that its return on assets had improved 23,02% this year from 21,06% last year but was lower than the 26,2% in 2007. The changes in return on assets showed how the company’s drivers on its return had altered over three years.

Raubex’s asset turn (the ratio of revenue total assets) had improved to 1,21 this year from 1,04 last year, but was lower than 1,59 in 2007. I knew that Raubex would invest more assets by acquisition, but it was probable that its asset turn next year would improve. On this probability, the company could well manage to sustain its return on assets, even though its operating margin would probably fall. This observation allowed me to suggest that forward bottom-line earnings per share could be in the range between 30% and 50% next year.

In the latest half-year report, its operating margin was 19,4% compared with 17,9% in the comparable half-year. In the comparable previous half-year, its capital expenditure was R232m. In the least half-year its capital expenditure was R164m. Revenue of R2,27bn rose half- year on half-year by only 1,8% to R2,27bn from R2,23bn.

This tells me I could well have been wrong in suggesting that asset turn could improve in next year. I could also be wrong on my expectation of lower margin although the directors reported that Roadmac, its main contributor to group revenue, operated at a lower margin in the latest half-year

I don’t, however, know Raubex’s target operating margin although I assume it has such a target for all its divisions.

I wanted to make a pro forma model for return on assets managed for next year. In the interim report, one of the major clues to inputs is the order book. At the end of August it was R5,2bn compared with R4,9bn a year ago. This is a plus for higher revenue and suggests its asset turn may not be endangered even if, as already mentioned above, it’s not probable to improve.

Possibly the most important clue for my pro forma model is the directors’ prospects for the company. They have taken into account the pressure on margins because of increasing competition in tendering but they expect ‘the group will deliver strong performance in the second half of the year’.

It’s fairly safe to assume that next year’s return on assets managed, will just about replicate that in 2009. This doesn’t imply that its bottom-line earnings per share will improve 50% or more year on year but 25% is a fair bet.

Since I wrote on Raubex in May, its share price has risen from R22 to RR23,75. On 2009’s bottom line diluted headline earnings per share of 288,2c, the share’s historic price:earnings ratio is 8,2.

At the fair bet, the forward price:earnings ratio is 6,6.

Source: Business Day