Skaffold’s Top 5 stocks for 2012, selected on January 10, 2012, were ARB Corporation (ARP, motor vehicle parts), Codan (CDA, communications equipment), ThinkSmart (TSM, consumer financial services), Seymour Whyte (SWL, construction services) and M2 Telecommunications (MTU, communications).

Including capital growth and dividends, $50,000 invested equally across the five stocks has returned 17.7% in 12 months. Add franking credits and the return is 19.45%. Over the same period, the All Ordinaries Accumulation Index returned 17.9%.

Today the market value of the portfolio is $56,849. Add dividend income and the profit is $8862 or a return of 17.7%; add $861 in franking credits and the overall return is 19.5%. Over the past 12 months you would have received dividend cheques totalling $2009. They alone more than cover the cost of an annual Skaffold membership.

At the time of selection, the five stocks stood out for superior quality, future growth expectations and the value for money they offered investors.

ARB’s share price has rallied almost 50%. While it remains a top-quality company with future growth forecast to continue, ARB’s share price no longer offers value. ARB produced a return on equity of 27% in 2012, compared with 31% in 2011. So the company’s Skaffold Score declined from A1 to A2.

Over the past 12 months, Codan’s share price has almost doubled, rising from $1.31 to $2.26, as at January 11. An institutional placement of almost 9 million shares completed in August 2012 to fund an acquisition, combined with a slight decline in earnings forecast for 2014, has resulted in Skaffold’s future value estimate being lowered. If the company is able to employ the new capital at similar rates of return achieved in the past, Skaffold’s future value estimate may rise. Codan remains a top-quality company forecast to generate returns on equity in excess of 30% over the next few years.

In M2 Telecommunications’ full-year results, it added $120 million of debt to the balance sheet to fund the acquisition of Primus Telecom’s Australian operations. Debt as a percentage of M2’s total equity now represents 66%. Skaffold prefers companies whose net debt: equity ratio is less than 40%. Including franking, M2 has returned 51% over the past 12 months. Shareholders should closely monitor how management employ the debt and integrate the acquisitions over the next three years.

In the past year, Seymour Whyte has seen the resignation of its managing director and announced a net profit forecast $4.1 million less than earlier guidance. The June announcement saw the share price fall from $1.70 to $0.98.

Despite two contract wins valued at almost $70 million (upgrades to a section of the Bruce Highway and a 1.6km stretch of the Great Western Highway at Bullaburra in the Blue Mountains, west of Sydney), the share price has continued to decline. Skaffold expects Seymour Whyte’s underlying value could rise by more than 20%pa in the next two years.

ThinkSmart released its full-year results in February 2012, just after being named in the Top 5. The company went from a having little debt and more than $20 million cash in the bank to a B4 rated company with more than $40 million in debt and a Funding Gap of $33 million.

A Funding Gap indicates the company has not generated enough cash to fund its ongoing operations throughout the year and may be forced to take on debt or raise capital from shareholders to continue operating. By June 30, ThinkSmart’s debt had fallen more than $21 million to $17.5m and the company’s Skaffold Score had improved to B2. Like M2, ThinkSmart should be monitored closely over the next few years.


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